Over the last few weeks, there has been one bit of positive news. The Iran war might be over, at least temporarily, for 60 days; there is a chance that it might be coming to a more permanent end.  

There is very clearly some sort of deal and agreement from both sides in relation to this, but what that actually means for the global economy and for the future of the conflict still very much remains up in the air. 

Although different terms have been floated, the terms of this deal aren’t necessarily public knowledge, and even when the public deal is visible, there are almost certainly other terms that remain behind closed doors. But at the end of the day, this certainly looks like a relief.

No longer the same world

There is no question that the Iran war has been the big bad in the global economy for the last few months. It has taken a world that was getting used to a particular form of low oil prices and rapidly shoved in their faces the spectre of much higher prices. 

Even moving forward, there is almost certainly some amount of damage that has been done. Even if the damage isn’t in relation to oil production, there is damage in relation to supply chain resilience, confidence, and the kind of risks that can exist in the future. 

Oil prices are currently trending downwards, and perhaps they will fall even further; they might even come down to the place where they were before the war started, but at the end of the day, even if the indicators return to exactly where they were, things are no longer the same.

An adjustment that leaves scars

A key part of why this would be the case really comes from the fact that the global economy is still highly interconnected and highly globalised. One part of the economy moving in one way immediately affects the rest of the world economy, and perhaps not in the most obvious of ways. 

Over the last few months, we saw one of the most obvious ways in which this happens – global oil prices shot up as supply constricted but not as much as feared. What balanced it out? Probably one of the main factors was supply drawdowns, and, critically, demand drawdowns in parts of the world, especially China. 

Oil pundits, as it were, got enough of it wrong. Oil did rise well above the $ 100 mark – particularly refined products, which even closed in on the $ 300 mark in April – but the sustained pressure with crude oil at $ 150 and refined products reaching $ 400 never really materialised, even as one of the biggest, if not the biggest, supply shocks to global oil actually did take place over the last few months. 

That is part of the non-linearity of the global system. It will adjust in ways that you perhaps have no idea about, but that adjustment is not painless, it is not costless, and it will leave scars.

We probably won’t even know what these scars are for some time. One particular area that I can hypothesise on is what happens to the economies of the Middle East now. First, oil prices were on a secular downtrend, so their budgets were being negatively impacted, and then suddenly oil prices began to dramatically help their budgets, but alongside massive economic damage. 

What happens to all these countries when such a massive shock occurs in both directions within a relatively short period of time? There is likely some amount of damage that has happened somewhere under the hood, and likely a certain amount of accounts that need to be balanced somewhere. Could this play out in completely unexpected ways sometime in the future?

The new normal

Across the last two years, we have seen some fairly significant changes to the global economy. 

First, you had what was trending upwards to be the big story of the decade – the global trade war. And before that had fully run its course, the Iran war became a very big story as well. You had two massive shocks to the global economy in just two years. 

When we talk about going back to what the global economy is like, that is probably what we go back to. We go back to a world where you have periods of calm punctuated by such moments of chaos. The global economy looks very fragile right now, and that is probably the new normal that we must get used to. 

It is possible that each of these shocks then lays the seeds for the next round. Perhaps the US political economy will shift in a way that supports security actions of this nature in the Middle East, or perhaps the costs undertaken by China at this point will affect the future action that it can take in Southeast Asia. Or perhaps both of these will move exactly in the other direction. 

There are plenty of ways in which the moments of chaos right now can lay the seeds for the future, and that is almost certainly part of the new normal that we are in.

The world has been working in a particular way in the past – the US working in the way it did, first as the capital driver of the world and then as the consumer driver of the world, and all that comes from that unipolar economic hegemony. That world is what seems to be changing right now. 

What that change looks like is perhaps not something I can figure out in one column of this nature, but it is a change worth discovering – because yes, the world will go back to normal after the war, or at least, at some eventual point in the future. What that normal would look like, I have no idea.

(The writer is the Head of Macroeconomic Advisory at Frontier Research, a Colombo-based firm that engages in macroeconomic research and advisory for corporate and investment clients on Sri Lanka, South Asia, and Southeast Asia. He can be reached at chayu@frontiergroup.info)

(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)