January 15th 2020

EIU Global Forecast - Suleimani's death marks turning point

The US decision to assassinate Qassem Suleimani, the commander of the elite Quds Force of Iran's Islamic Revolutionary Guards Corps, on January 3rd has taken US-Iran tensions to a new level. At first glance, the US strike appears at odds with the reluctance of Donald Trump, the US president, to drag the US into a new war in the Middle East. However, from Mr Trump's perspective, it represents a calculated response to the recent escalation in tensions between the US and Iran, which culminated in an attack against the US embassy in Iraq by Iran-backed militia in late December. As the embassy attack illustrates, these tensions have mainly unfolded in Iraq, a country where both the US and Iran wield significant influence and which represents the new battlefield between both countries.

The US is rewriting the rules of engagement in the Middle East

The US drone strike against General Suleimani has two direct consequences for Iran. First, the real message behind the US attack is that the US has the ability to track the whereabouts of top Iranian military commanders in real time, possibly through the use of informants that operate within the Islamic Revolutionary Guards Corps. The US's ability to get past Iranian defences will be chilling for the Iranian leadership, and Iran will invest a lot of time and effort to strengthen its counterintelligence capability. Second, the legally dubious assassination of General Suleimani has set a precedent and rewritten the rules of engagement for all actors in the Middle East. Mr Trump's decision to kill the general has made every US soldier, diplomat and citizen present in the Middle East a potential target for Iran. As such, US forces stationed in Saudi Arabia, Bahrain or Iraq are obvious targets for the Iranian leadership (US troops in Qatar may be safer, given Qatar's good ties with Iran).

A direct conflict between the US and Iran remains unlikely

Despite the heated rhetoric, we continue to believe that a direct conflict between the US and Iran remains unlikely. Mr Trump will be reluctant to open a new military front in the Middle East for fear of undermining his re-election chances in the November 2020 presidential poll. Meanwhile Iran's leaders know all too well that the country does not have the military and financial means to wage a war against the US. That said, the currently high level of tensions between both sides has complicated communication, and the risk of a miscalculation cannot be ruled out. We estimate that there is a 25% chance that the US and Iran will be dragged into a direct, conventional war, which would have devastating consequences for the global economy.

Iran's response has been mild and proportionate

Iran's limited response so far supports our view that the US and Iran will not enter a direct conflict. On January 8th the Islamic Revolutionary Guards Corps launched strikes against two US military bases in Iraq. However, the limited nature of the attacks suggests that Iranian military commanders made every effort to avoid US casualties: the Iranian government warned its Iraqi counterpart that it would strike US military bases a few hours beforehand (knowing full well that the Iraqi military would warn the US side to put its soldiers to safety). Iran's limited strikes therefore achieved two goals: on the domestic scene, they showed the Iranian population that the country was retaliating against the US; and on the international scene, the limited response showed that Iran remained wary of triggering a direct conflict with the US. As such, Iran appears willing to de-escalate the current situation. In a speech on January 8th Mr Trump confirmed that he was not seeking war either. He mentioned that Iran's strikes would not lead to a US military response, but rather to a strengthening of US sanctions against Iran (which can only be a symbolic move, as US sanctions are already extremely broad and stringent).

Tit for tat will continue in the coming weeks

In the coming weeks US-Iran tensions will remain elevated, and there is a high risk that Iran (or its proxies) will launch targeted attacks against US interests in the Middle East; such attacks are likely to take place in countries where the US and Iran support different sides or factions, such as Yemen, Lebanon, Syria and Iraq. Cyber-attacks (from both sides) are also a distinct possibility. The US or its allies, such as Israel, could cripple Iranian nuclear facilities or institutions through the use of computer viruses. Meanwhile Iran also has the capacity to wage cyber-attacks against US companies; the financial and energy sectors appear the most sensitive, given the importance that companies in these fields have to the US economy. Should such attacks take place, it is possible that they would not be made public; the US and Iran would be keen not to appear as vulnerable, partly for fear of stirring panic within the population.

The EU appears increasingly sidelined in the US-Iran dispute

The latest escalation in US-Iran tensions illustrates that the EU, a signatory to the Iran nuclear deal, appears increasingly sidelined in the US-Iran dispute and unable to mediate a compromise between both sides. This is partly the result of disagreements between core EU member states on how to move forward with Iran when the UK and eastern European countries are more aligned with the US, and core EU members such as France and Germany are more willing to defy Mr Trump. In addition, even within countries that appear to be more on Iran's side, such as France, support for Iran is far from unanimous (Iran tried to wage a terror attack in France in late 2018). Such a situation does not bode well for the EU's objective to play an increasing role on the global scene. It also means that US sanctions against Iran will not be lifted any time soon and will continue to target international businesses willing to trade with Iran.

The global economy is safe, for now

Our 2020-21 global growth forecasts have long reflected our expectations that US-Iran tensions would remain high but remain short of a full-blown war. As such, we maintain our view that the global economy will grow by 2.3% in 2020 (up from an estimated 2.2% in 2019). Downside risks to this forecast remain high, however, especially if a flare-up in tensions leads to the closure of the Strait of Hormuz, through which about 20% of global oil supplies transit. Oil markets have so far reflected these fears; on January 6th crude oil prices briefly rose to US$70/barrel, but since then they have eased back to about US$68/b (the level that they were at before General Suleimani's assassination). We expect oil prices to remain elevated in the first quarter of 2020, at an average of US$68/b (up from US$65/b previously). However, coupled with record US oil production, an expected slowdown in the Chinese and US economies will keep a lid on oil prices in the coming months. Should US-Iran tensions flare up, however, oil prices could rise to as much as US$90/b, fuelling a rise in inflation and dampening sentiment. This represents one of the main risks to the global economy in 2020‑21.

World economy: Forecast summary
  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Real GDP growth (%)                    
World (PPPa exchange rates) 3.4 3.3 3.8 3.5 2.8 3.1 3.4 3.6 3.5 3.4
World (market exchange rates) 2.8 2.5 3.2 2.9 2.2 2.3 2.7 2.9 2.8 2.8
US 2.9 1.6 2.4 2.9 2.3 1.7 1.8 2.0 1.8 2.2
Euro area 2.0 1.9 2.7 1.9 1.2 1.3 1.6 1.7 1.6 1.6
Europe 2.0 1.9 2.8 2.1 1.4 1.6 1.8 2.0 1.9 1.9
China 6.9 6.7 6.8 6.6 6.1 5.9 5.7 5.5 5.0 4.7
Asia and Australasia 4.6 4.5 4.9 4.5 3.9 3.9 4.2 4.2 4.0 3.9
Latin Americab 0.1 -0.3 1.8 1.6 0.6 0.9 2.3 2.5 2.6 2.5
Middle East & Africa 2.3 4.8 1.4 1.2 0.2 2.0 2.9 3.1 3.3 3.3
Sub-Saharan Africa 2.7 0.8 2.3 2.4 2.0 2.4 3.3 3.9 4.2 4.5
World inflation (%; av)b 3.0 3.1 3.2 3.4 3.5 3.6 3.4 3.2 3.1 3.0
World trade growth (%) 2.2 2.1 5.8 3.7 0.8 2.3 3.5 3.6 3.6 3.8
Oil (US$/barrel; Brent) 52.4 44.0 54.4 71.1 64.0 65.0 67.0 71.0 73.8 71.0
Industrial raw materials (US$; % change) -15.2 -2.2 20.2 2.2 -8.6 0.5 4.0 3.3 0.8 1.1
Food, feedstuffs & beverages (US$; % change) -18.4 -3.5 -0.9 1.5 -4.3 2.4 2.2 0.2 1.3 1.5
Exchange rates (av)                    
¥:US$ 121.0 108.8 112.1 110.4 109.0 106.9 104.8 101.1 97.6 95.4
a Purchasing power parity. b Excludes Venezuela.
Source: The Economist Intelligence Unit.
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