Iran agreement: relief for the economy?

How the Iran agreement could ease the economy

The Iran agreement is fueling hopes of an easing of the economic situation. The Iran war had previously significantly dampened expectations of a slight upturn this year. Now at least a possible end to the war is coming into view, even if many contentious issues between the parties to the conflict remain unresolved.

The dpa-AFX report indicates that the resupply of crude oil, liquefied gas and fertilizer from the Gulf could quickly get under way again. In the medium term, prices are likely to fall. That would support the economy, which has recently been burdened by higher costs, material shortages and reduced growth forecasts.

The stock markets in Asia had already reacted positively to the agreement, and the oil price fell significantly. US President Donald Trump was optimistic and declared with regard to the blockade of oil transport through the Strait of Hormuz: "Ships of this world, start your engines! Let the oil flow!"

Iran agreement meets strained industry

The crisis resulting from the Iran war had hit Germany hard. Alongside higher prices, which burdened many households, industry once again reported material shortages. As a result, economists halved their economic forecasts.

"An end to the war would have positive effects on the economy," says economist Timo Wollmershäuser, head of economic research at the Munich Ifo Institute. "Initially, world market prices for crude oil and natural gas would fall, causing inflation rates to fall immediately and consumers' purchasing power to return."

In the scientist's assessment, capital market and lending interest rates could also fall, because further increases in key interest rates would not materialize. For companies in mechanical engineering, in production and in energy-intensive industries, that would be an important relief factor.

Strait of Hormuz: what now lies ahead for mechanical engineering

The Iran war is becoming a stress test for German mechanical engineering. Energy prices, supply chains and postponed investments are hitting an industry that is already under pressure. Two experts on the current situation.

Why energy prices are unlikely to fall immediately

However, the economic effect of the Iran agreement is unlikely to be felt in full immediately. Production facilities in the Persian Gulf region are apparently damaged. As a result, it could take time before the supply of crude oil, natural gas and associated intermediate products reaches its pre-war level again.

"Therefore, energy prices will probably not fall back to their pre-war level immediately and the supply chain problems could continue for a while," says Wollmershäuser. For industry, that means: easing is possible, but not overnight.

The ADAC also does not expect an abrupt return in fuel prices to the level before the war. A spokesperson for the automobile club explains: "If an end to the Middle East war leads to the Strait of Hormuz once again being freely navigable and oil transports there being able to run smoothly, the oil price should also gradually fall."

However, it will take time until stable processes along the supply chains are restored. "Immediate reductions in fuel prices to the level before the war are therefore not to be expected, especially since infrastructure has also been damaged or destroyed that cannot be rebuilt immediately."

GDP growth: Germany edges up slightly

GDP growth in Germany is positive at the start of the year. But despite the confirmed increase in the first quarter, the Iran war, energy prices and falling equipment investment are weighing on the outlook.

How quickly the Strait of Hormuz will become passable again

A central factor remains the Strait of Hormuz. The US government and many experts assume that Iran has partially mined the strait. How many explosive devices actually lie there is not known. However, the danger of possible mines alone is enough to massively impair shipping traffic.

Before a return to normal operations, mine clearance would therefore first be necessary. According to the report, European states have already made preparations for this. Only after the completion of such an operation would shipping traffic like before the war be conceivable again.

In the meantime, the US military could step up its efforts to guide ships through the strait. In addition, there is a logistical problem: many ships are in the wrong place after four and a half months of the Iran war. Hundreds are still stuck in the Persian Gulf, others are now travelling on alternative routes.

Before the war, around 100 to 150 ships a day passed through the strait. A return to this level is likely to take time. A further prerequisite is that the Iran agreement holds and that there is no renewed fighting.

Why supply chains remain under pressure

The Strait of Hormuz alone is not crucial for global supply chains. Danish shipping expert and consultant Lars Jensen points to another conflict that is even more significant for container shipping.

"From a global perspective, the more significant factor (for container shipping) is not the Hormuz crisis, but the crisis in the Red Sea," says Jensen. Since the start of the Gaza war in autumn 2023, many international shipping companies have been avoiding the shortest sea route from East Asia to Europe via the Red Sea and the Suez Canal.

Instead, the ships often travel around the Cape of Good Hope at the southern tip of Africa. This route means a detour of many thousands of nautical miles and journey times up to two weeks longer. The result is tight capacity and high prices.

In the Red Sea, the Iran-backed Houthi rebels threaten shipping. An easing of the Hormuz crisis could therefore also be significant for this conflict. "A solution to the Hormuz crisis could also set the stage for a possible solution to the crisis in the Red Sea," says Jensen. "That in turn would release shipping capacity on a large scale and bring about a turnaround in the market from the current capacity shortage to oversupply."

Industry reports more material shortages again

Material shortages in industry are increasing sharply. According to the Ifo Institute, significantly more companies reported bottlenecks in intermediate products in April.

How stock markets could react to the Iran agreement

International stock markets have so far been affected to varying degrees by the Iran war. In the USA, the S&P500, the index of the 500 largest listed companies, is higher than before the start of the war. Frankfurt's Dax was hit harder and lost almost 3,000 points from the end of February to the end of March. It then rose significantly again, with some fluctuations.

If the war were actually to end, lasting relief on the financial markets would be possible. According to DZ Bank analyst Birgit Henseler, large industrial groups in particular are among the growth drivers on the Frankfurt stock exchange.

Alongside developments surrounding the artificial intelligence boom, according to the report large German companies continue to benefit from the federal government's multi-billion fiscal package. The Iran agreement could reinforce this positive impetus if energy prices and supply chain risks ease.

Iran war: why industry is coming under pressure

The Iran war is driving energy prices, burdening supply chains and increasing production costs. The economic consequences are already noticeable in Germany across numerous sectors.

What the Iran agreement means for the economy

The German economy was expected to grow moderately this year thanks to the federal government's 500-billion-euro debt package. After the start of the Iran war, the federal government halved its economic forecast to only 0.5%. The outlook for 2027 also remains subdued. The economic experts expect gross domestic product growth of 0.8%.

An end to the Iran war could improve the economic situation. Falling energy prices, less inflationary pressure, more relaxed supply chains and lower financing costs would be relevant factors for industry and consumers.

At the same time, structural problems in the German economy remain. Companies and economists have for years criticized rising social security contributions, high energy prices and too much bureaucracy. If nothing changes in this regard, an end to stagnation is not in sight in the assessment of many economists.

With material from dpa