Israel-Iran attacks: economic impact
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And this is Andrew Peach with World Business Report. Friday has seen Iran retaliate with ballistic missiles on Israeli cities following its earlier strikes on Iran's nuclear facilities. The Iranian leader vowed to inflict heavy blows on Israel after the Israeli Defence Force said three Iranian military commanders had been killed. The US President Donald Trump has urged Iran to make a deal on its nuclear programme, warning of even more brutal Israeli attacks if it doesn't.

At the UN, McCoy Pitt, who's a senior official in the State Department, ramped up the pressure on the Iranians. The United States will continue to seek a diplomatic resolution that ensures Iran will never acquire a nuclear weapon or pose a threat to stability in the Middle East.

Amir Syed Irvani is the ambassador and permanent representative of Iran at the United Nations. He too has been speaking. The United States' complicity in this terrorist attack is beyond doubt. The officials of the United States have expressly and presently confessed their willful aid and assistance in the crimes.

On World Business Report, we'll look at the economic threats posed by conflict in the Middle East. What does it mean for the economies of Iran and Israel? What about the price of oil and how concerned it makes companies about investing in the region? And we'll also look at how the shipping sector is starting to plan for disruption. If the Strait of Hormuz was to have a problem, you could be in a situation where cargo is really at sea and doesn't have an easy route into the Gulf countries.

Now, in a moment, we'll look at Israel's economy. Let's start with Iran, though. And Nega Mortazavi is an Iranian-American journalist and host of the Iran podcast, also senior fellow at the Centre for International Policy and live on World Business Report from Washington. Nega, thank you for being with us. How long can Iran do this? How long can it carry on on a war footing? Thanks for having me. Well, the Iranian economy is not in great shape yet.

after years of economic sanctions that have targeted every aspect, every industry of the Iranian economy, including oil, the major export. But I don't think economy is the major concern right now. You know, this is, this has been the largest attack on Iran since the 1980s war with Iraq. It's been unprecedented. It came kind of unexpected. It really shocked Iran.

the citizens, residents, and then also the government, obviously, as we see that these senior officials were all killed. So I don't think economy is a main concern right now, the cost of this war, rather, you know, defending the homeland and also retaliating, which for them is a way to establish deterrence because there aren't really many good options in front of them if they don't retaliate.

They would get hit harder. They may feel they've got no choice to respond from a political point of view, but you've got to pay for it. And I just wonder how sustainable the funding is from within Iran or from Iran's allies.

Absolutely. So I don't think this can go on in long term. Obviously, the cost of war is very high and Iran doesn't have, for example, the kind of support Israel has from the United States. Israel has been able to continue the war in Gaza in the past two years with U.S. support, financial support, billions of dollars in aid and also arms and weaponry support.

that the U.S. supplies. Iran doesn't have that kind of like any source of support, financial or weaponry like that. Due also to sanctions, they've had to sort of improvise or create a lot of domestic production of their own weaponry. They couldn't buy the same modern or

or, you know, sort of technological weaponry. And so their arsenal is also limited as far as the capacity in what they can use to fight. So this isn't going to be very much long-term viable economically. But I think right now in the short term, the cost is not the main concern. I mean, it,

Were the Assad regime still in place in Syria, they might have got some backing there. Of course, Iran does have pretty strong ties with China and Russia, but not to the same extent as Israel and the US. And I don't think it extends to them, you know, paying the bills, writing cheques.

No, it doesn't. So yes, the Assad regime in Syria, essentially, that was Iran's closest state ally in the region. But even that state wasn't in good shape towards the end. It was mostly a one-way sort of relationship, Iran investing and spending a lot of money.

resources in Syria. And that relationship has gone anyways. Russia and China, Iran does have good relations with China, mostly relying on them for trade and Russia for military support, obviously both veto powers in the UN Security Council. But it's not the kind of relationship Israel has with the US, you know, unconditional decades of support, essentially blank check and lots and lots of funding.

Russia itself is tied up in its own ongoing war in Ukraine. And China doesn't really do that kind of investment, doesn't have that relationship with Iran as far as a major unconditional support, either financially or as far as arms support.

One plank of what Iran could do here is cause quite a bit of disruption to the global economy one way and another by affecting the price of oil, by disrupting shipping. These are, in a way, weapons that are easily at Iran's disposal. Yes, indeed. I mean, Iran is one of the major oil producers in the world itself. The other major ones are mostly in the neighbourhood, Iran's neighbours.

And so that's also something that we saw towards the end of the war between Iran and Iraq in the 1980s, that oil flow, the global oil flow was impacted. So that's something that Iran could potentially disrupt even through its own production or through disruption in that region.

waterway in the Strait of Hormuz and the southern waterway. And then also potentially by escalating into attacks on the oil fields in its neighborhood. A few years ago, we saw an attack on the Saudi oil facility that impacted the market for a while. And so Iran has...

are threatened, and this is something that they could do in the past. And I think that's one reason also we don't see the Arab powers really get involved in this. We saw Saudi Arabia immediately condemn the Israeli attack on Iran, and others don't seem to want to be involved because of that fear that this is going to impact not just their oil, but also their economy, their prospects for trade and stability, which is the core of that safety that they need for their investment plan.

Nega, thank you very much indeed for that. That's Nega Mortavezi live from Washington. So what about the health of the Israeli economy and its ability to withstand the cost of strikes against Iran, the defence of its own cities and the disruption this all causes? Well, that's a question Professor Svi Ekstein of the Aaron Institute for Economic Policy at Reitman University and former deputy governor of the Bank of Israel has been looking at.

Well, the key aspect, there are two issues. One is how long it will take and how much it would cause people out of work. You know, it's something like a COVID impact that you stay at home. We have to stay very close to the shelters and that would prevent a large percentage of the population not working as it actually happened today in the morning. And

The question is how long it will take and how long it will take. It matters of how, you know, the number of rounds. We made a prediction based on about four rounds. We are now in the beginning of the first round. But we also make the prediction that in the rounds with the Iranian, then we will have the missiles coming in. And that the big cost of preventing the missiles from landing and causing damage, as we did in April and October,

And on that basis, we made a calculation of how much it costs, because the heads and the dome are very expensive. And that's the key aspect of how expensive would be this event, this kind of war with the Iranian to the Israeli economy in this year.

So there's all sorts of costs adding up here, aren't there? There's the cost of launching the attacks on Iran. There's the cost of defending Israel. There's the further cost of the economy of people not able to work properly. And this is in the context not only of this potential conflict with Iran, but also what's happening in Gaza and what's happening on the border with Lebanon. Yeah, we're

With Gaza, the impact on the overall economy is minor, besides the fact that we have about 100,000 people on reserve, and that's preventing some activities, including they're married and there's a problem with the wife, have to take care and the household not function fully.

All that we calculate the impact on the economy. And Gaza also costs quite a bit, about 1% of GDP. And that's increasing the deficit by itself to close to about 6%. And if we have the war with the Iranian, if it will go for one month with about four rounds, then we expect that that's with the deficit of the government close to 9%. Bottom line here is, can Israel afford it? Well, you know, basically it's...

We can afford it in the following way. Our debt to GDP at the end of 24 was about 68 percent, much lower than England. We expect that even with above 6 percent deficit, we will reach 70 percent because the economy could grow about 2 percent. And the main problem with the Iranian, if it will cause a huge damage to the economy, meaning that

the Iranian will attack with the missiles and people will stay at home and not work, then it would have a larger impact, you know, similar to what happened in the COVID. But in any case, also, we will reach maybe 75% of GDP debt. This is way below a lot of European countries. And

And the main aspect of the Israeli being to finance it in the future years depends very much on the outcomes of this war. If we get to normality, Israel's potential growth rate is about 3.5%. Our real interest rate on debt is not more than 2%. And therefore, we basically have a very strong economy, very strong growth rate, and we're

stable economy. In this way, we can afford it in the sense that we can repay it later if we will get at least 10 years of no wars at the size that we have in the almost two years. I mean, I take your point that it would still leave Israel's debt to GDP ratio lower than other countries. But I suppose another way of looking at it is you've got to compare it to where things are now. It would have consequences, presumably, for the Israeli government in terms of what it could...

spend on social services, other public services? What level of tax it would need to raise? It does have some kind of impact on all of that, surely. Well, the point, as I say, the key point in paying back debt is what is the real interest rate versus the growth rate. That's the main components. And Israel...

economy is growing much, much higher than most European and Western economies because population growth is very close to 2%. And as long as we have a full employment as we have actually now during the war, then the economy could grow on productivity on about 3% to 3.5%. And that's enable you to pay back a debt, which is even 80% of GDP.

The key issue is what would be the requirement on armed forces services, on the army expenditures. We were actually only 4.5% of GDP before October 6. It seems that what the army would need in order to keep operating in Afghanistan

a very hostile situation, would be something about one additional percent of GDP. You know, if you compare to European NATO members, even England, this is about five and a half percent of GDP. That's something that has become almost common that some European countries going there, even Germany, you know, and Poland and others.

That was Professor Zvi Eckstein. At that point in our conversation, he had to leave to go to a bomb shelter. This is World Business Report with Andrew Peach from the BBC World Service, looking at what's been happening in the Middle East today, the impact on the wider region, what might be next. Chris Lowe is Chief Economist at FHN Financial with me from New York. Let's look at oil prices. What's happening with them, Chris?

Well, not surprisingly, Andrew, they're quite a bit higher, especially last night. And I think, you know, this has been a two-part move. When traders came in this morning in New York, prices were already hovering around $75 a barrel here in the U.S., Brent trading a couple of dollars above that.

But the realization as more conversation came out of Israel, came out of Iran, the realization that this wasn't a one and done event, that both sides are committed to extending this conflict deeper. You know, we saw a secondary rise in price.

So is there evidence of this affecting more broadly the markets beyond the oil price?

Yeah, you know, it's been a very interesting reaction. I mean, start with the stock market, which is down today. We've traded effectively sideways the last few weeks. So a 2% drop in U.S. equity markets, it puts us at a low for the past couple of weeks. It takes out the range there.

And then the other thing I think maybe the biggest surprise is that when there is a big geopolitical event that threatens to spill over like this, you see a risk-off trade, people leaving risk assets like stocks.

And generally, we see a really nice rally in the U.S. Treasury bond market. But that has not happened. We came in this morning to find bond prices down, bond yields up. And I think that's primarily because the world looks at the U.S. as effectively tied at the hip with Israel and the worry that the U.S. could be pulled into this conflict.

Let's bring in Sami Hamdi, Managing Director and Head of Political Risk at the International Interest, a global risk and intelligence company. Sami, thank you for being with us on World Business Report. What is your assessment of the risk in this situation? What would you be advising any clients who called you?

I think that the main concern at this moment in time is how long will this go and the security of infrastructure in the region. Trump withdrew U.S. personnel and there is this sense that there is an expectation of a retaliation. And the question is, what are the areas where retaliation will take place?

Some oil companies are concerned that it might involve some oil fields or some oil infrastructure. In 2019, when the Houthis attacked the Abqaiq oil facility, there was an expectation that the U.S. would respond, and instead the U.S. didn't, and Trump was at the helm.

During that particular period. So I think there is concern that this will escalate. There's also concern that it escalates even further. Then it will start affecting shipping routes and the like. We're talking about increased in insurance premiums as well in particular. But I think the main concern that many are asking is less about the extent of the Iranian retaliation and the extent to which the U.S.,

is involved and the extent to which the U.S. is willing to get involved. There is a concern that given that there's been a sort of overreach on the part of the Israelis, whether it's through the guards to guards and the like, there's deep concern that there was an expectation that Trump would bring some sort of stability to the region. But it seems that there's concern that instead it will escalate.

Well, the lack of interest in U.S. securities is probably indicative of the lack of predictability, the lack of certainty as to what might happen. We'll come back to both of you in a second or two, but let's just focus in on shipping for a second or two and see how businesses are reacting to the news that Iran is attacking Tel Aviv and Israel's continuing its strikes on nuclear facilities in Iran. I've been talking to Richard Fettel,

co-founder of Zen Cargo, the company which transports freight around Europe, North America, Asia and the Middle East. Look, I would say in the world of shipping, we're used to geopolitics really disrupting our clients and disrupting the market on an almost weekly basis, and particularly the last five or six years since COVID. You don't really get a month's pause without something that's going to significantly disrupt the market. So, of course, we've just been sort of digesting the

the movements in the market as a result of the Trump tariffs. We've been managing the last 12 to 18 months of the closure of the Red Sea, now starting to see some movement in the Red Sea, but still it's ostensibly closed. And I would say that it's another occasion where we

woke up to something that we have to digest and understand what the impact is going to be for our clients and for the industry more broadly. What I would say is that at this stage, I think the impact is one more of speculation than anything else. I can imagine that both the Americans and the Iranians are probably looking for an off ramp. And there are, I guess, many parties for whom de-escalation is an optimal scenario. It does feel that there's a heightened risk that

because the Iranians don't seem to have a lot of leverage, you know, particularly with the loss of, you know, the power of their proxies and the fact that they're very much weakened this year, it does look like that, you know, that there is some risk that they take action in the Strait of Hormuz. And that's something that they obviously did

Last year, with the seizure of the MSC Ares, which was a big vessel that they managed to seize and take back to Iran last year. And it's something that they've done in the past, I think, in the Iran-Iraq war. But it's something that the market increasingly today is speculating could have a very significant impact on global shipping, the oil markets and the global economy.

see an immediate response from customers either making inquiries or actually making changes to the freight they want you to transport for them? So I think the thing that people are worried about right now is if you're an exporter in the UK who sells into the Middle East, into the Gulf countries, so let's say you're shipping consumer goods to Dubai, there is a question as to whether if you load something on a vessel this week, if it's going to have a challenge arriving.

And if you imagine we're operating in an environment where many of the vessels are not moving through the Red Sea, if the Strait of Hormuz was to have a problem, you could be in a situation where cargo is really at sea and doesn't have an easy route into the Gulf countries.

And so, yes, you know, customers are starting to ask, could there be an impact here for my business? But I would say that it's something that people are really just starting to digest more than anything else. I would say, you know, away from our business, which is really containerized freight, I did have a conversation with someone in the oil business earlier today and said,

He has a trade on where they're selling oil out of one of the Gulf countries and they'll need to pick it up in about 10 days time. And the question really is, you know, will they be able to get a vessel? Do your customers have other choices because they need to get their goods from A to B? Clearly, they don't want that to be disrupted.

But do they have a choice to go, OK, if the Strait of Hormuz looks a bit iffy, then we'll do something else? Yeah, so there are some choices in it, but it really does depend what you're shipping. So there's, of course, air freight. And whilst, you know, the airports in Israel are closed, the airports in the Gulf countries are not closed.

And so, you know, air freight from the rest of the world into the Gulf is moving. But I would say from a sea freight perspective, there is much more of a challenge because if there is a problem in the in the Strait of Hormuz, the other alternative is to go through the Red Sea, which continues to have some challenges. Whilst the Houthis have said that they're not planning on firing, you know, right now, most of the shipping lines are still not going through the Red Sea. And so there are very few options that we're

become available at that point. And customers have to look at land transportation over very long distances, which is very expensive. So if you have a product, furniture, bulky product or a heavy product, which doesn't favour itself to air freight, for which air freight is very expensive, then you might be in a position where you really can't get your goods to market.

That's Richard Fettel from Zen Cargo. Sammy Hamdi from International Interest is still with me on World Business Report. The Middle East sees conflict all the time. Is this of a different order? Is this going to be enough to make investors think, do we really want to be involved in the region? I think that the general rule for many investors is that where there is chaos, there is money to be made. I don't think it necessarily puts investors off. I think the issue with today's escalation in particular is

is that some of the scenes that we're seeing in the region are rather unprecedented, in particular what we're seeing in Gaza. Some of the clients that I speak to, one of the main questions that they ask is how long will Gaza continue? Because they've identified that that appears to be the source of a lot of the current escalation that is causing a lot of the concern, whether it's with regards to the Red Sea and the Houthis attacking the ships as a result of Gaza, whether it's this escalation with Iran as a result of Gaza and beyond and the war that is taking place.

I think that the concern really lies in the extent to which Israel will be allowed to continue as it is. And the reason why lots of clients are focused on Israel in and of themselves is because there is this sense that the political impunity that it enjoys increases their unpredictability.

of what could happen in the region, given that we're now entering almost uncharted territory in terms of the number of fronts that have been opened in the region. Investors are looking at places such as Lebanon, places such as where they're looking at the instability that's taking place in Egypt and these other countries. Wherever you look, even Turkey in and of itself, we've seen that the impact on the domestic politics with Erdogan losing 10 cities in

in the mayor, in the municipality elections as a result of Gaza in and of itself is causing further instability with regards to Turkey's economic outlook as well. So everything seems to link back to Gaza. And that's why the uncertainty over the willingness of the U.S. to find some sort of solution with regards to Gaza is certainly making investors agitated. Saudi Arabia thought that by bringing in the U.S. president to Saudi Arabia today,

in a sort of show of confidence in the Saudi economy in terms of bringing investors and the like. And the Saudis yesterday were celebrating that the air traffic was being diverted over Saudi airspace. They saw it as a mark of confidence there.

in the security and stability of Saudi Arabia but even then it hasn't really translated into the numbers that Saudi Arabia wants and there is a concern that if the situation in Gaza continues the current stability enjoyed in Saudi Arabia and in Egypt and some of these other countries will become very much impacted by Gaza as a

population sympathetic to them begin to take action. Chris Lowe at FHN Financial in New York. Where is Donald Trump the dealmaker in all of this? I see he's been posting even in the past couple of hours, it's not too late for Iran to make a deal over its nuclear program. But he's talked up the idea of making a deal over Iran's nuclear program, over Gaza, over Lebanon. How's he doing with that? Well, obviously, no success yet, right? And I think...

Now that this attack last night by Israel was so unexpected, and you look at the reaction out of the international community at the UN, for example, complete shock.

It is a wake-up call to Iran. And obviously, Iran's initial response will be to fight back. That goes without saying. But perhaps longer term, particularly as the costs start to mount. And remember, too, Israel made those attacks possible.

earlier during the war and took out a lot of Iran's air defense systems. And that's one of the reasons they were able to move so successfully last night. I think the pressure is there. Iran, we heard earlier on the show, right, from the Iranian spokesman blaming the U.S. for this attack.

And that is going to be the initial, I think, sort of lashing out. Chris, I'm really sorry to interrupt you because we're right at the end of the program. Thank you so much to Chris Lowe from FHN Financial in New York and also Sammy Hamdi, who is live with us from International Interest. And from me, Andrew Peach, thanks for being with us for World Business Report.

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