Effects of the Middle East conflict on the German economy

The geopolitical conflict led to turbulence on both the financial markets and the oil market. Increased risk premiums raised financing costs for indebted countries, and higher uncertainty shifted demand of international investors towards for safe havens, which was reflected in a permanently higher gold price. The risk of bloc formation in the global economy, which had already increased due to the trade conflict between the USA and China and the Russian war of aggression in Ukraine, took on a new dimension, which once again shook the business model of many German companies based on the international division of labor. Although the situation on the oil market calmed down somewhat, discussion arose about the threat of a new oil price shock. Model simulations using the Global Economic Model from Oxford Economics show that an increase in the price of oil to $150 per barrel (Brent) is associated with a decline in overall economic output in Germany of around 1 percent and an increase in consumer prices by 1.3 percent within two years. However, the results of the present analysis also show that the probability of such a scenario is very low. The oil intensity of overall economic production has fallen sharply in recent decades and Europe and the USA are significantly less dependent on oil supplies from the Persian Gulf, which makes the use of the “oil weapon” less likely. In particular, the weakening global economy and the associated decline in oil demand have already significantly reduced the price of oil just a few weeks after the start of the conflict and the forecasts assume a significantly lower oil price than the one whose effects were examined in the extreme scenario mentioned above. Nevertheless, the tense geopolitical situation remains an important brake on the recovery of the economy - both in Germany and worldwide.