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Middle East crisis may escalate uncertainties

The dramatic escalation in tension in the Middle East threatens to escalate global economic uncertainties.

india Updated: Jul 18, 2006 16:56 IST

The dramatic escalation in tension in the Middle East have come at a testing time for the global economy which has been engulfed by a growing sense of uncertainty.

In particular this follows the threat posed to economic growth by a slowing US economy along with the push by the world's leading central banks to hike up rates in a bid to contain inflationary risks triggered by surging oil prices.

Israel's military onslaught on Lebanon had noticeably increased the risks for the oil market, said Commerzbank energy analyst Barbara Lambrecht. As a result of the "total geopolitical risks", she said a new record oil price of $ 80 could not be ruled out.

What is worrying analysts is whether central banks will manage to strike a balance between hiking rates that dampens inflationary pressures in the economy without undercutting growth.

The turmoil also comes on top of deepening concerns about how the international community will face up to the missile tests by a defiant North Korea, Iran's nuclear ambitions and the daily bloodshed in Iraq.

While the world economy and money markets have been remarkably adept in recent years in shrugging off concerns about international flashpoints and high-energy costs, fears appear to be growing that one world crisis area appears to be rolling into another.

Already the gloomy geopolitical picture combined with a fragile economic outlook have resulted in analysts scaling back their growth projections for the world's three biggest economies - the US, Europe and Japan.

Now with the Middle East tensions threatening to spin out of control and oil prices teetering close to record highs, fears are growing that the slowdown might be more pronounced with concerns that instead of a gradual slide in growth the US could face a much harder landing.

Worries about a new Middle East conflagration have already sent shudders across world financial markets with a string of falls in international bourses and US 10-year bond yields under pressure.

While stronger-than-expected US industrial output helped Wall Street to edge up in early trading Monday after hefty losses last week, the turmoil in the Middle East quickly reversed the initial gains.

"The conflict surrounding Israel does not hit the oil market directly but significantly impacts on the mood," said Tobin Gorey energy strategist with the Australian Commonwealth Bank.

At the same time, the crisis in the Middle East helped to keep the upward pressure on the gold price, which hit its highest level in two months on Monday of $ 675.50.