Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I was Stephanie Flander's head of Government and Economics at Bloomberg.
Speaker 2: This is trump Panomics, the podcast that looks at the
Speaker 2: economic world of Donald Trump, how he's already shaped the
Speaker 2: global economy, and what on earth is going to happen next.
Speaker 2: This week, nearly a month since the US and Israel
Speaker 2: started bombing Iran, we thought it was time to take
Speaker 2: stock of the economic consequences of that war, but also
Speaker 2: the broader implications for the US and its allies. And yes, Trumpnomics,
Speaker 2: because watching how this entire conflict is unfolded since late
Speaker 2: February and the deeply suboptimal weighs out of this seemingly
Speaker 2: now for the US, it feels like, far from crumbling
Speaker 2: as President Trump appears to have expected, the Ranian regimes
Speaker 2: not only survived but given the President a lesson in
Speaker 2: how you deploy economic leverage in today's economy. As one
Speaker 2: of our guests today writes in a forthcoming piece, Iran
Speaker 2: didn't want this war, but now it has reasons to
Speaker 2: prolong it. That's a problem for us all, certainly for
Speaker 2: President Donald Trump, who seems unable to reopen the straight
Speaker 2: of Horror moves. Despite its threats. It's a problem for
Speaker 2: the global economy for reasons we can already see and
Speaker 2: some others will discuss in a minute. But it's also
Speaker 2: a problem for future governments because if the straight of
Speaker 2: hor moves can be closed once, it can be closed
Speaker 2: again even if the war ends tomorrow. Iran's key takeaway
Speaker 2: will be how easy and cheap it is for them
Speaker 2: to hold the global economy hostage. Iran has some very
Speaker 2: valuable cards, you might say, and thanks to Donald Trump,
Speaker 2: it now knows how to play them in the UK.
Speaker 2: I'm delighted to go through all of this. We have
Speaker 2: Dina's FOUNDERI our lead geoeconomics analyst for the Middle East
Speaker 2: and also the co author of that I just cited Diina.
Speaker 2: Thank you so much for joining. I know you've got
Speaker 2: a very busy day.
Speaker 1: Thank you so much for having me and.
Speaker 2: In Washington, familiar voice, Tom Or, a chief economist for
Speaker 2: Bloomberg Economicist. Tom, thanks very much for coming back.
Speaker 3: Great to be here. Thanks Stephanie.
Speaker 2: I was struck when we think about counting the cost
Speaker 2: of this conflict. I mean, we had a regular meeting
Speaker 2: with all the economists earlier today starting to think about
Speaker 2: our latest forecast for the world, and that sort of
Speaker 2: forced us to confront the many ways in which the
Speaker 2: picture has changed and may yet change further because of
Speaker 2: this war. Just talk us through some of the basic
Speaker 2: economic consequences that we've seen from this conflict already just
Speaker 2: in four weeks.
Speaker 3: So I think the short answer on what the Iran
Speaker 3: war means for the global economy is nothing good. And
Speaker 3: the long answer is, well, this is going to impact
Speaker 3: on multiple different dimensions. Most obviously, we have energy prices
Speaker 3: already sharply higher. That's going to push inflation up. It's
Speaker 3: going to eat into household's budget for consumption. Higher inflation,
Speaker 3: lower growth. That's not a positive story. We're also seeing
Speaker 3: the Iran war impact financial markets. We're seeing gauges of
Speaker 3: uncertainty rising, We're seeing equity prices falling higher, uncertainty, lower markets.
Speaker 3: That's not a positive for growth either. The last piece
Speaker 3: of it is what this means for central banks and
Speaker 3: borrowing costs. I think heading into twenty twenty six, the
Speaker 3: expectation was this is going to be the year where
Speaker 3: inflation finally gets back to target. Certainly we're not going
Speaker 3: to see any more rate hikes and probably we're going
Speaker 3: to see a bunch of rate cuts. While that narrative
Speaker 3: has now very significantly changed. If we look at what
Speaker 3: markets are betting on, they've taken all the rate cuts
Speaker 3: off the TI and for the Bank of England and
Speaker 3: the European Central Bank. Actually the expectation of many investors
Speaker 3: is there could be rate hikes coming now. Whether or
Speaker 3: not you believe that forecast is true, the fact that
Speaker 3: that's what investors are betting on is already having an impact.
Speaker 3: So we're seeing higher borrowing costs for businesses, borrowing costs
Speaker 3: for households. That's an additional drag on growth.
Speaker 2: What you brought out there, which I think is important,
Speaker 2: and we're seeing more now than we did in the
Speaker 2: first week or two when the expectations were still that
Speaker 2: it was going to be potentially a very short conflict.
Speaker 2: Is those broader knock on effects. The O price goes up,
Speaker 2: headlines around that were now at maybe I don't know,
Speaker 2: one hundred and ten something like that dollars a barrel.
Speaker 2: That's obviously affecting petrol prices in the US. That on
Speaker 2: the road diesel price has risen by more than a
Speaker 2: dollar per Gallon since the end of February, which people
Speaker 2: in America obviously notice. But there's also the sort of
Speaker 2: there's all those indirect consequence and the biggest, as you've mentioned,
Speaker 2: is what happens to financial conditions and interest rates, Dina.
Speaker 2: The piece I sort of liberally quoted earlier, you're highlighting,
Speaker 2: along with our chief emergy market economist Asadode, a basic asymmetry,
Speaker 2: which is that Iran has reasons now to prolong this
Speaker 2: war ironically, whereas the US, thanks to all this economic pain,
Speaker 2: wants it to end as soon as possible. For some people,
Speaker 2: that will sound counterintuitive when you consider the amount of
Speaker 2: damage being inflicted on Iran on a daily basis. So
Speaker 2: maybe just take us through that, sure.
Speaker 1: I think the first thing that's important to note is
Speaker 1: that for the Islamic Republic, the moment is existential. It
Speaker 1: really is. This is about survival of the Iranian government.
Speaker 1: They face a perfect storm of crises, a political one,
Speaker 1: an economic one that's been around for decades, and a
Speaker 1: social and environmental crisis. And we saw this spill over
Speaker 1: a couple months ago with the protests inside the country,
Speaker 1: also saw the really harsh government prac down that demonstrated
Speaker 1: that they really are out of tools for dealing with
Speaker 1: these crises other than using just brute force. So what
Speaker 1: are they going to try to do with this conflict.
Speaker 1: They have two main goals. The first is they have
Speaker 1: to survive it, obviously, but the second is, in order
Speaker 1: to ensure that they last as a government, they also
Speaker 1: have to re establish to terrence visa vi the United
Speaker 1: States and Israel, and that means basically imposing such a
Speaker 1: significant cost on everyone in order to ensure that the
Speaker 1: US and Israel do not regroup and come back in
Speaker 1: six months time and reattack Iran, which is pretty much
Speaker 1: what happened this time around. So really this strategy of
Speaker 1: imposing a cost is on three levels. The first one
Speaker 1: was obviously hitting the US in Israel directly because they're
Speaker 1: the warring parties. The second was hitting the region, especially
Speaker 1: the Gulf Arab states, so they hit infrastructure in those
Speaker 1: countries but also energy infrastructure. And the third was really
Speaker 1: to impose a global cost for the war by closing
Speaker 1: the Straight of Foremons and again hitting regional energy infrastructure,
Speaker 1: which inevitably was going to impact the rest of the world.
Speaker 2: We talked about the economic pain that the world is
Speaker 2: feeling from the conflict. In your piece, you sort of
Speaker 2: highlight there's another asymmetry that the Iranian economy is actually
Speaker 2: doing potentially better than it would have done before the war.
Speaker 2: I mean that's in some respects. Obviously we're seeing enormous
Speaker 2: amount of damage from the attacks, and that seems to
Speaker 2: be now not just in military targets, but more broadly
Speaker 2: across the country. Some other aspects are actually doing slightly better. Tom.
Speaker 2: I know you've been looking at that a little bit,
Speaker 2: some of the ways in which the Iranian economy has
Speaker 2: actually been doing better.
Speaker 3: Yeah, I think that's right, Stephanie. This war is driving
Speaker 3: up energy prices. Who gains from that, Well, it's countries
Speaker 3: that can continue to export oil and capture the higher price, right,
Speaker 3: So who's on that list, Well, Iran is on that list.
Speaker 3: The Strait of Hormuz is closed, but it's not closed
Speaker 3: to Iran's own tankers. Iran's exports of oil are down
Speaker 3: a little bit since the start of the war, but
Speaker 3: relative to other Gulf oil producers, they're not down very much,
Speaker 3: and they're able to capture the benefits of significantly higher
Speaker 3: oil prices. And so one way we see that reflected
Speaker 3: is this kind of slightly extraordinary move in the US
Speaker 3: and Iranian currencies. Here we have the US, the world's
Speaker 3: greatest power, pummeling Iran with the world's most advanced military kit,
Speaker 3: but whose currency is up since the start of the war.
Speaker 3: It's Iran's currency, right, And I think that tells you
Speaker 3: a story about a sort of slightly unusual and unexpected
Speaker 3: dynamic a work here.
Speaker 2: The extra level of that really sort of made people
Speaker 2: sit up this weekend, or certainly me was the Treasury
Speaker 2: Secretary also announcing the removal of the US sanctions on
Speaker 2: the Iranian oil at sea, which is of course directly
Speaker 2: putting money in their pockets to potentially buy more drone
Speaker 2: equipment from China or elsewhere. I mean, Dina, you've already
Speaker 2: highlighted some of the sort of asymmetries that are feeding
Speaker 2: into this. We're seeing at so many different levels. It's
Speaker 2: not just that the economic pain is being felt more
Speaker 2: by the US and its allies than by others, but
Speaker 2: also this massive cost difference between the cost of what
Speaker 2: the US has to do to keep attacking Iran or
Speaker 2: indeed take hold of the straight orfore moves versus how
Speaker 2: relatively cheap it is for Iran to continue to defend
Speaker 2: these things.
Speaker 1: Absolutely. Iran, when it comes to this war, is on
Speaker 1: the right side of the cost curve. So the munitions
Speaker 1: that Tehran is using. The missiles, of course, are expensive
Speaker 1: to produce, and Iran has a limited number of them,
Speaker 1: but they're also relying quite a lot on drones on Shahad.
Speaker 1: Drones that are really cheap to produce can be produced
Speaker 1: pretty much anywhere in facilities that would look like any
Speaker 1: commercial production industrial facility, which means they're really difficult to
Speaker 1: find and target for the United States and Israel, and
Speaker 1: it can produce a lot of them. So Iran is
Speaker 1: producing these drones quite cheaply. When it comes to blocking
Speaker 1: the strait, it relies on drones, it relies on missiles,
Speaker 1: but it can rely on a whole range of other
Speaker 1: very cheap options. Sea mines are one of them. It
Speaker 1: could literally use little wooden boats with explosives and send
Speaker 1: them out into the middle of the Strait and that
Speaker 1: would be enough to pose a threat to close the strait.
Speaker 1: So for Tehran it's very easy and comparatively cheap to
Speaker 1: cause this much disruption, and of course that is Tehran
Speaker 1: mean lesson learnt. On the other side, for the United
Speaker 1: States and its partners in the region, missile defense interceptors
Speaker 1: are quite expensive to produce, and they cost a multiple
Speaker 1: of the cost of a shah head drone. And while
Speaker 1: they are now using different methods to protect themselves against
Speaker 1: these drones, generally the use of interceptors against drones just
Speaker 1: puts you on the wrong side of the cost CUF,
Speaker 1: making it very expensive to defend yourself.
Speaker 2: It's an exaggeration, but of course Vietnam is the conflict
Speaker 2: that sort of hangs over some of these discussions in
Speaker 2: the US. And I guess what's striking about this is
Speaker 2: there's a slightly self perpetuating element to this, or self
Speaker 2: financing element to this on the Iranian side that the
Speaker 2: worse it gets, the higher the oil price goes, and
Speaker 2: the more funds that Iran potentially has to continue the war,
Speaker 2: which is actually not a direct dynamic that you saw
Speaker 2: in the case of Vietnam. Tom are we getting carried
Speaker 2: away also with just the degree to which Iran is
Speaker 2: holding the US, the world's biggest economy hostage at some level,
Speaker 2: The US does have powerful weapons here it could apply
Speaker 2: some have talked about having a full blockade of Iranian oil,
Speaker 2: seizing of Iranian tankers, for example, rather than lifting sanctions.
Speaker 2: Are we underestimating the chances of that, given that it
Speaker 2: is somewhat embarrassing for the US to be in this
Speaker 2: position in theory.
Speaker 3: Just briefly on the Vietnam War analogy, Stephanie, that remarkable
Speaker 3: move by the US over the weekends to de sanctioned
Speaker 3: Iran's oil actually reminded me of that famous quote from
Speaker 3: one of the US soldiers in the Vietnam War, it
Speaker 3: became necessary to destroy the village in order to liberate it. Right,
Speaker 3: in the Iran War context, it turns out it's become
Speaker 3: necessary to liberate Iran's oil in order to destroy Iran.
Speaker 3: Coming back to your question, I think Iran is certainly
Speaker 3: demonstrating some powerful asymmetric capabilities here. But you're certainly right
Speaker 3: that the United States, as the world's superpower, as the
Speaker 3: world's most powerful military, as the world's most powerful economy,
Speaker 3: does have a number of levers which it can pull. Right.
Speaker 3: I think one question, sitting here in DC and hearing
Speaker 3: frankly rather contradictory messages flying around Iran has forty eight
Speaker 3: hours to open the Straight of Hormuz or will decimate
Speaker 3: their power infrastructure. We have a fifteen point plan for
Speaker 3: Iran that we are happy to discuss and potentially will
Speaker 3: have a truce while we discuss it. For me, that
Speaker 3: raises the question, Well, the US has a number of
Speaker 3: powerful leavers of economic statecraft that it could pull to
Speaker 3: start shifting the dynamic in global energy markets. But is
Speaker 3: there anybody here who is thinking through those options in
Speaker 3: a coherent way? Is this an administration which is positioned
Speaker 3: to deploy the formidable set of economic statecraft tools that
Speaker 3: they have at their disposal.
Speaker 2: Staying with you, Tom, if we're sort of thinking now
Speaker 2: slightly longer term about potential paths and what the implications
Speaker 2: are for the global economy. I mean, we talked at
Speaker 2: the start about the damage that we're already seeing, and
Speaker 2: in fact we're seeing it in the now cast. The
Speaker 2: very sort of short term forecast for inflation, even for
Speaker 2: just the month that we're in now for March, have
Speaker 2: already gone up by potentially half a percentage point or
Speaker 2: more in most of the major economies just because of
Speaker 2: this shock. A few weeks ago. We could have In fact,
Speaker 2: we did talk about a sort of short shot shock
Speaker 2: scenario which wouldn't have brought very much lasting damage to
Speaker 2: inflation or to growth. That ship has sailed or got
Speaker 2: stuck in the strait of what page? But what are
Speaker 2: the possible paths from here? How much of that economic
Speaker 2: pain you talked about is now baked in for the
Speaker 2: rest of the year. I mean, are we looking at recessions?
Speaker 2: What should we be looking for?
Speaker 3: So I think the first question is how long does
Speaker 3: the war continue and at what intensity? So if we're
Speaker 3: in a world where the war continues but at a
Speaker 3: moderated intensity, and we're in a world of say one
Speaker 3: hundred to one hundred and ten dollars oil in the
Speaker 3: second quarter, that's a world where inflation is markedly higher,
Speaker 3: perhaps between zero point five and one percentage point. So
Speaker 3: if you were thinking about inflation of two point five percent,
Speaker 3: you should probably be thinking about inflation of three to
Speaker 3: three and a half percent. It's a world where growth
Speaker 3: is lower. If we're looking at the Euro Area, for example,
Speaker 3: shaves around half a percentage point of growth for a
Speaker 3: region which is already grown pretty slowly. And it's a
Speaker 3: world where central banks have a difficult decision. Do they
Speaker 3: hike to contain inflation and inflation expectations, or do they
Speaker 3: cut to support growth. But that's a manageable shock, right.
Speaker 3: If the war continues at a much at a higher
Speaker 3: level of intensity, if the straight of horn Mooz stays closed,
Speaker 3: well that's a world where our modeling suggests we could
Speaker 3: have oil moving markedly higher, perhaps as high as one
Speaker 3: hundred and seventy dollars a barrel. That's a world where
Speaker 3: you have a much larger increase in inflation, a much
Speaker 3: lower a much more significant blow to growth, a much
Speaker 3: more difficult decision for central banks. And that's a world
Speaker 3: where you start thinking more about stagflation risk, more about
Speaker 3: recession now looking a bit further forward, and about too
Speaker 3: optimistically anticipating the end of the war. I think the
Speaker 3: critical question for oil prices and for the global economy
Speaker 3: is going to be, firstly, well, how much lasting damage
Speaker 3: has been done?
Speaker 2: Right?
Speaker 3: It's not just the strait of her moves being closed.
Speaker 3: There's also drones hitting very very significant parts of Gulf
Speaker 3: energy infrastructure. An important question is how quickly can that
Speaker 3: be fixed? And an additional question is, well, how much
Speaker 3: of a geopolitical risk premium stays in the market, right,
Speaker 3: how much to oil traders say, Okay, the war's over,
Speaker 3: We're back to the world of sixty five dollars oil,
Speaker 3: And how much do they say, yeah, the war's over.
Speaker 3: But you know what, this could kick off again. We
Speaker 3: need to keep a geopolitical risk premium in the price.
Speaker 2: How things go from here for Iran and its relations
Speaker 2: with the broader regime is actually going to affect the
Speaker 2: answer to Tom's question. I mean, many people will think
Speaker 2: that we've been making Iran sound too good and painting
Speaker 2: it as this kind of skillful regime that's managed to
Speaker 2: play its cards very effectively. But as you pointed out
Speaker 2: the beginning, this is a tyrannical regime that had weakening
Speaker 2: power in many ways, had been forced to brutally suppress
Speaker 2: its population earlier in the year, and it's using the
Speaker 2: only tools it has at the risk of massively alienating
Speaker 2: countries that hadn't been as negatively disposed to it. Has
Speaker 2: it overplayed some of the few cards it has as
Speaker 2: particularly in sort of alienating other Gulf countries, hitting civilian
Speaker 2: targets there, and by all accounts, really putting them on
Speaker 2: America's side.
Speaker 1: So I think Iran is going to face a really
Speaker 1: tough moment once this war finally winds down. You pointed
Speaker 1: out domestically, it's going to struggle because it is out
Speaker 1: of tools, and none of those realities will have gone anywhere.
Speaker 1: The only thing the war did was divert attention elsewhere,
Speaker 1: focus Iranians tension more on the US and Israel bombing
Speaker 1: campaign than on their own government. At some stage, they're
Speaker 1: going to have to deal with the grievances that the
Speaker 1: Iranian population have, and again they're still out of those
Speaker 1: tools unless they're able to make some kind of deal
Speaker 1: where they could get some sanctions relief and allow the
Speaker 1: government to really put in place an economic plan with
Speaker 1: reforms et cetera, etc. That would help improve the domestic situation.
Speaker 1: So that's domestically in the region. Iran, before the war
Speaker 1: was in somewhat of a better place with some of
Speaker 1: its bellfare of neighbors. Over the last few years, they
Speaker 1: had begun to build ties. It had mended some of
Speaker 1: its tensions with Saudi Arabia and the UAE in particular.
Speaker 1: It had a good working relationship with the others. The
Speaker 1: Glfaer of States really tried hard to lobby against a
Speaker 1: war with Iran with President Trump, and given what had
Speaker 1: happened in the region over the course of the last
Speaker 1: few years, the GOLFA Up States began to see Israel
Speaker 1: as a bigger threat than Iran, so that was actually
Speaker 1: a pretty good position for Iran to be in. But
Speaker 1: with this bombing campaign, with some of Iran's retaliation and
Speaker 1: the region, the new reality is that the bigger threat
Speaker 1: for the Golfare Up States once again is Iran, and
Speaker 1: they're going to have to adjust the way they deal
Speaker 1: with Iran as a result of that, so they are
Speaker 1: likely to boost defense investments even more than they have
Speaker 1: in the past. The golfare Up States are likely to
Speaker 1: double down and become even closer to the United States,
Speaker 1: even though many of them are very frustrated with President Trump,
Speaker 1: and they're likely to focus on containing Iran rather than
Speaker 1: engaging it, which will mean that Iran will find itself
Speaker 1: in a difficult position regionally, especially since many of its
Speaker 1: regional non state partners have been weakened over the course
Speaker 1: of the last two three years.
Speaker 2: Do you know I guess our final thought from you.
Speaker 2: I've had conversations with Tom on this show over the year,
Speaker 2: and one of the things we've noticed from the US
Speaker 2: efforts to apply economic leverage visa v. China have inspired
Speaker 2: China to double down on finding alternatives in order to
Speaker 2: not have that kind of vulnerability. I mean, now everyone's
Speaker 2: been reminded very vividly of n Iran's ability to hold
Speaker 2: the world hostage in that very small strait. Surely we're
Speaker 2: going to see a lot more efforts to find alternatives
Speaker 2: on that front as well. I mean, is one consequence
Speaker 2: going to be that in five or ten years the
Speaker 2: straight uform moves is not as important as it is today.
Speaker 1: I think it will have less importance than today. I
Speaker 1: think it will still be important because I think the
Speaker 1: golf are up. States are going to continue to get
Speaker 1: their oil out somehow. They are likely to divert some
Speaker 1: of their oil so that it doesn't go through the strait. So,
Speaker 1: for example, Saudi Arabia is diverting much of its oil
Speaker 1: through pipelines that goes to the Red Sea. But none
Speaker 1: of these alternative ways of getting oil out are particularly safe.
Speaker 1: After all, the Hothees are present in the Red Sea,
Speaker 1: and while they haven't joined the war yet, the threat
Speaker 1: looms large that they will. The golf airb states are
Speaker 1: likely to invest a lot more in building more pipelines.
Speaker 1: Clients of energy from the region are also likely to adjust.
Speaker 1: There is likely to be some rerouting of oil, perhaps
Speaker 1: from Asia to Europe, with Asia having to look elsewhere,
Speaker 1: something similar for gas for example. But there's likely to
Speaker 1: be re routing, There's likely to be diversion, there will
Speaker 1: be changes, but it won't be enough to completely wipe
Speaker 1: out Hormons. It's importance.
Speaker 2: Both of you have brought home. Long term, there's going
Speaker 2: to be enormous cost of this conflict for both sides
Speaker 2: and maybe especially for Iran. But short term they have survived,
Speaker 2: and they seem able to survive a good deal of
Speaker 2: collateral damage, perhaps more than the US. Thank you very much,
Speaker 2: Thanks Stephanie, Thank you, thanks for listening to Trumpomics from Bloomberg.
Speaker 2: It was hosted by me Stephanie Flanders, and I was
Speaker 2: joined this week by Tom Orlick and Dina s Fanduri
Speaker 2: from Bloomberg Economics. Trumpnomics was produced by Samma Sadi and
Speaker 2: Moses And with help from Amy Keen, and sound design
Speaker 2: was by Blake Maples and Nick Johnson. To help others
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