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Middle East tensions menace a delicate economy

August 29, 2013

| MoneyRates.com Senior Financial Analyst, CFA

The next month will see several announcements that could signal key developments in the economic recovery, including a revised estimate of second-quarter GDP, an update on employment, August inflation numbers and the statement from the next Federal Open Market Committee meeting.

None of these, however, has the potential to be as disruptive to the economy as events taking place thousands of miles away in the Middle East.

Economic effects of conflict in the Middle East

The Middle East always seems to be the centerpiece of global turmoil, but lately tensions have been rising beyond their usual level. The alleged use of chemical weapons by the Syrian regime may prompt intervention by the United States and its allies. Already, the conflict has become something of a proxy war between hostile governments in the region. Now, it has the potential to draw in an even wider sphere of combatants.

Further raising the stakes is that Syria is home to Russia's only naval base outside of the territories of the former Soviet Union. For a country that has been concerned with naval power since the days of Peter the Great, this ready access to the Mediterranean is a high priority, so Russia has strongly supported the existing Syrian regime. So, perhaps more so than at any time since the end of the Cold War, the United States and Russia find each other on opposite sides of a military conflict.

Meanwhile, farther south and west along the Mediterranean coast, Egypt seems on the verge of a civil war. Given Egypt's military strength, its history as one of the more stable nations in the region, and its non-belligerence toward Israel over the past 30+ years, the potential for dramatic change in Egypt is unsettling to the entire region.

The most immediate economic danger posed by unrest in the Middle East is a rise in the price of oil, which could quickly spur broader inflation. According to the U.S. Energy Information Administration, the price of a barrel of oil was already up by more than $14 from the start of 2013 through August 26. Then, oil spiked by another $3.09 on August 27, as rhetoric concerning Syria heated up.

Implications for interest rates

Consumers could have a lot to lose if rising oil prices lead to inflation. Interest rates would be likely to rise, making mortgages more expensive and possibly snuffing out the recovery in home prices. Meanwhile, savings accounts could lose even more ground to rising inflation. Rates on savings accounts might finally rise, but most likely at a slower pace than surging prices, thus quickening the pace at which savings accounts are losing purchasing power.

There are human and strategic costs to consider in decisions concerning the conflicts in the Middle East. On top of that, the economic costs could have a widespread and long-lasting impact.

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