NZ Herald business editor at large

Liam Dann: Syrian crisis weighs on world economy

The American public seems unable to accept its leaders' assurances. Photo / AP
The American public seems unable to accept its leaders' assurances. Photo / AP

The threat of Western intervention in Syria has markets on edge and looks set to add another layer of complexity to the global economic outlook.

We are already in strange and unprecedented times as economists and market players attempt to decode the ramifications of the end of the US stimulus policy.

What happens when normal service resumes in the US economy and the Federal Reserve stops printing money and raises interest rates?

So far, it looks like what happens is that the US dollar rises and the US economy sucks capital back from emerging markets.

What isn't so clear is the extent to which the emerging economies around us are in good enough shape to handle that. The economic reactions in both India and Thailand have been far more negative than expected at this early stage.

The US Fed hasn't even said when it will start tapering the stimulus, let alone actually doing it.

But now let's throw in an oil price spike and some fresh uncertainty about a new US military campaign and see what happens - will it dampen the US recovery or further destabilise markets in Asia?

Even talking about the vagaries of markets can seem glib. But this isn't a column about politics or the human tragedy of the situation - needless to say those things are far more serious and morally important than the fallout on markets.

Anyone who saw the pictures of those rows of dead children after the gas attacks last month knows what is really at stake.

Nevertheless, whatever your views on Western intervention, there will be fallout and it will be largely negative for the global economy.

Popular conspiracy theory always had it that war was good for business - but it is hard to see how.

The US can't afford another long-term military engagement and the threat of Middle Eastern instability always pushes oil prices higher.

Former presidential candidate Senator John McCain has attacked President Barack Obama over his stance - largely on economic grounds.

That the Republicans seem as reluctant to get involved in this conflict as the left does in Britain is a pretty good indication of how morally confused the West is on this issue.

A lack of trust persisting from the Iraq war appears to have left the public in the US and Britain unable to accept the assurances of their leaders. It is an unfortunate state of affairs, although hardly surprising given the political events of the years since the 9/11 attacks.

President Obama still seems like a good man to me, but it's a shock to be reminded that no one becomes leader of the United States unless they are capable of deciding to go to war.

The scale of US plans is not clear. It could be limited to a symbolic air strike or it may yet be stalled by diplomatic bureaucracy, which might - hopefully - see the need for action overtaken by more positive events. But that seems unlikely.

There seems little evidence that Syria has any kind of stable and peaceful future ahead of it in the near future.

Were the West - or America and France, anyway - to become embroiled in something longer and more serious, then markets would react very badly. That's because risk profiles would shift to include a greater chance that Iran and/or Israel could be drawn into the dispute.

That would be very bad indeed and hopefully will not happen. But markets are always trying to predict the future, and while they often get too far ahead of themselves they have to price in the risk.

So we have already seen oil prices reacting. They spiked to above US$112 ($145) a barrel last week, the highest level since May 2011, before easing back as it became apparent a strike was not happening by the end of the week.

Last week JBWere analyst Bernard Doyle warned of a US$120-a-barrel tipping point for serious negative impact on the world's economy.

Whether it hits that level or not we should expect to see the upward pressure push the retail price of petrol higher. That could be exacerbated here as the US dollar rises and the kiwi falls - the expected trend as the US Fed drops the stimulus.

But of course we now have the counter-force of a new negative pressure on the US economy. High fuel costs are not good news for its recovery, which is still fragile even though signs of life have been stronger of late.

It is possible that higher fuel costs could dampen the activity of US consumers and businesses, allowing the Fed to delay its path.

That has a downside for us too - the lower kiwi was something that many of our exporters have been really looking forward to, and in some cases need rather urgently.

We will have to wait and see. It is a complicated set of scenarios at play on the global economy and highly unpredictable.

Meanwhile, we'll watch with sadness and disbelief at what is happening in Syria - as we have done for two years now. And we'll hope that whatever moral choices are made by the world's leaders, they are made with deep, deep thought.

On Twitter: @liamdann

- NZ Herald

Get the news delivered straight to your inbox

Receive the day’s news, sport and entertainment in our daily email newsletter

NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

Have your say

1200 characters left

By and large our readers' comments are respectful and courteous. We're sure you'll fit in well.
View commenting guidelines.

Sort by
  • Oldest

© Copyright 2017, NZME. Publishing Limited

Assembled by: (static) on production bpcf05 at 25 May 2017 02:44:46 Processing Time: 405ms