The U.S.-Iran conflict that began in late February has led to “a boatload of uncertainty” around the near-term outlook, Moody’s Analytics chief economist Mark Zandi said on Marcus & Millichap’s “Middle East Conflict: Implications for U.S. Economy and CRE” webinar. Amid this uncertainty, there are competing headwinds and tailwinds for the economy, and Zandi said he sees these two factors “battling it out, basically to a draw.”
The headwind is the price of oil. Zandi cited a rule of thumb which holds that every increase of $10 per barrel raises inflation by 20 basis points and cuts growth prospects by 15 bps.
“So you can do the arithmetic,” he said. “It’s not recessionary, but it’s certainly a significant headwind to the economy and obviously doing some damage.”
Conversely, the tailwind helping to power the economy is artificial intelligence, and in particular data centers. Here, the impact of AI is twofold: the economic activity generated by data center development and operation, and the prices that tech company stocks are trading at.
With a headwind and a tailwind each exerting comparable pressure on the economy, further adjustments to the federal funds rate appear to be on hold. “The Federal Reserve doesn’t really know what to do with all of this,” said Zandi. “”When you’re uncertain, you kind of sit on your hands, and that’s exactly what the Fed says it’s going to do in the Iran war.”
Asked by Marcus & Millichap president and CEO Hessam Nadji to forecast the near-term outlook for domestic economic growth, Zandi predicted modest monthly job creation and a slightl rise in the unemployment rate. “It’s okay,” he said. “We can manage that. It’s just not going to feel all that comfortable.”
John Sitilides, senior fellow, global risks with the Center for National Interest, detailed the importance of the Middle East’s waterways to global trade, and not only to exports of oil. That’s because the region is home to “three of the world’s most important strategic choke points,” including the Strait of Hormuz, the Bab al-Mandab Strait at the southern end of the Red Sea and the Suez Canal.
“All of this comes together in a very interconnected way,” said Sitilides. “A free and open trading system” needs to be maintained “in order to ensure that the global economy can continue to prosper and to grow for countries around the world.”
On the domestic front, John Chang, SVP, chief intelligence & analytics officer with Marcus & Millichap, sees investors taking the conflict in stride. “People are talking about this in their investment committee meetings,” he said. “They’re talking about the risks, the uncertainty that we’re grappling with, but we are also seeing those same people say, ‘we don’t know what the future holds, but, we believe this is short-term,’ ” probably less than a year.
Regardless of short-term global macroeconomic disruptions, said Chang, commercial real estate buyers understand that “they’re going to be holding these investments for a long time. As a result, I’m still seeing a lot of investors continuing to drive forward with their purchases and their dispositions.”
On-demand replays of the April 20 webinar are available by registering here.
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