What Israel–Iran conflict means for South African economy

In a globalised world, what happens on one continent invariably affects the rest of the world, and the conflict between Israel and Iran will probably be no different. Oil prices have become volatile, while investors go for gold as a safe haven, and the rand feels the shock.

Frank Blackmore, lead economist at KPMG, says the impact of the conflict between Israel and Iran on global markets, including South Africa, will depend on two key factors.

“Firstly, the scale of the conflict matters. Will it escalate, and will other nations become involved by taking sides?

“If the conflict intensifies beyond what we are currently witnessing, the impact will be far more significant. Secondly, the duration of the conflict also matters. If it is resolved swiftly, the effects on the markets will likely be limited.

“The impact will be felt in two ways. Firstly, through the oil price, and we have already seen an increase since the onset of the conflict. Secondly, through the exchange rate, the rand has already depreciated due to heightened uncertainty, which could lead to inflationary pressure on the local economy and the possibility of interest rates remaining higher for longer.”

Blackmore says that given that both oil and the exchange rate affect the impact of the cost of transporting people and goods around the economy, the inflationary impact will be shifted down onto the consumer in the form of higher inflation. The Reserve Bank may then be forced to maintain elevated interest rates for an extended period.

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Israel-Iran conflict already rattled global markets

Sanisha Packirisamy, chief economist at Momentum Investments, says the intensifying sectarian conflict between Israel and Iran, driven by Israel’s airstrikes on Iranian nuclear and military facilities and Iran’s subsequent missile responses, has indeed rattled global markets.

“Oil prices spiked by more than 10%, with international Brent Crude Oil prices briefly reaching $78 per barrel due to concerns over potential disruptions in the Strait of Hormuz, which is a vital oil corridor for global oil supply.

Although prices later stabilised, ongoing tensions could fuel inflation, constraining central banks’ flexibility to lower interest rates in 2025, particularly against the backdrop of a protectionist environment marked by higher trade and tariff barriers.”

Packirisamy, also points out that equity markets saw initial declines but later recovered as hopes for de-escalation grew, particularly with the US reaffirming its defensive rather than offensive position. “Safe-haven assets, including gold, US treasuries and the US dollar, gained traction amid rising uncertainty.”

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Geopolitical shocks historically have fleeting impact

She says historically, geopolitical shocks tend to have fleeting market impact unless they significantly impair economic growth or trigger stagflation. “Currently, Iran’s oil exports remain mostly unaffected, with their domestic markets largely targeted so far.

“OPEC’s spare capacity also has the ability to mitigate global oil supply concerns, given that spare capacity could match any shortfall from Iran. However, prolonged conflict or a blockade of the Strait could drive oil prices significantly higher, threatening global economic stability.

“However, blocking the Strait would prevent their own shipments from getting out and could trigger retaliation from other exporters.”

Packirisamy also notes that signs of diplomatic efforts, particularly from the US administration, will be critical to watch, given that a de-escalation in the conflict and a lower risk of spilling over into a broader-based regional conflict are necessary for market normalisation.

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Volatile oil prices due to Israel-Iran conflict

George Brown, senior economist at Schroders, also notes that oil prices are volatile as the conflict continues. He says similar incidents in recent years amounted to a limited exchange, with Iran’s response typically sufficient to demonstrate domestic strength without escalating tensions further.

So far, he says, this conflict has proved to be more brutal than other recent escalations. “Even so, it remains a direct exchange of fire between Iran and Israel with minimal disruption to the oil market.

“The US and several Middle Eastern nations, including those that already condemned the attacks, such as the UAE and Saudi, have no interest in a flare-up of tensions in the region, nor do they wish for disruption of global oil markets. Previously, they intervened to calm situations like this.

“Israel has stated that the operation will continue for ‘as many days’ as it takes to remove the Iranian threat, but hostilities could settle if Middle Eastern countries and the US mediate a resolution.”

Brown says the likelihood of Iran taking any action in the Strait of Hormuz, the often-touted disaster scenario for oil markets, appears remote. “Such action would impact flows for the other Middle East nations, which are aiming to mediate the situation, while inflicting little harm on Israel.”

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Oil facilities not primary target in Israel/Iran conflict

Iranian oil supply makes up 3.5% of the global supply. However, Brown says Israel’s stated aim has been to impede Iran’s nuclear program, consistent with the fact that most strikes so far targeted Iranian nuclear and military facilities.

“While oil production facilities remain a potential target for Israel, it has yet to target them directly, quite possibly restrained by the knowledge that pushing oil prices higher would damage its relationship with its allies, such as the US.”

Outside of the conflict, Brown points out that other dynamics in the market continue to point to a global market oil surplus continuing to build in the coming months. “Although oil prices are sensitive to this type of conflict, as in previous similar events, the initial price rise moderated in the following hours.

“If Brent Crude settled at $75 per barrel, it would imply that G7 energy inflation would be a little above 5% over the next year.”

Would this lead to broader inflationary pressure? Brown says probably not. “Our previous research on the relationship between oil prices and inflation suggests that every 10% rise in oil prices adds just 0.1% to core inflation.”

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If US joins, Israel-Iran conflict could push oil price higher

Bianca Botes, director at Citadel Global, warns that tensions are rising in the Middle East, with speculation mounting that the US could soon join the ongoing conflict. “High-level security meetings and strong public statements have added to the sense of urgency, while both Israel and Iran appear determined to escalate the conflict after several days of hostilities.”

She says these developments pushed oil prices higher, as markets brace for the possibility of a broader confrontation. “Asian stocks have been mixed, while Wall Street closed in the red. Investors are also cautious ahead of a key monetary policy decision from the Fed today.

“Expectations are that rates will remain unchanged, but it is the forward guidance that will play a critical role in market dynamics. The dollar has softened, and emerging market assets are under pressure as traders weigh both geopolitical risks and uncertainty over future US interest rate moves.

“Risk appetite remains subdued as global markets await further clarity.”

The rand is under pressure amid risk-off sentiment, trading at R17.98/$, R20.68/€ and R24.17/£, Botes says.