Assessing The Global Economic Impact Of The Middle East War

(MENAFN- ING)

Needless to say, the war in the Middle East is one of these fast-moving environments, and even the best geopolitical analysts are struggling to predict how it could end. For financial markets, the branching point is simple and more brutal: does this end in days, or does it become a forever war that involves an entire region? Crucial factors here are whether, how and when there could be a regime change in Iran; the duration and intensity of US involvement; and the length and severity of any disruption to traffic through the Strait of Hormuz.

In shaping our view, we are working with a base case scenario that assumes roughly two weeks of ongoing combat, involving not only the US, Israel and Iran but the entire Middle East region. Air traffic will be down and the Strait of Hormuz will be basically blocked. After these two weeks, political instability in Iran will remain, but broader uncertainty will recede and the Strait of Hormuz will gradually reopen. Within four to six weeks, conditions could return close to the pre‐war environment, albeit with elevated levels of uncertainty. Given that there is no historical evidence of quick and smooth regime change in any country, the risk to our base case scenario is clearly to the downside. Think of 'boots on the ground', much longer-lasting military action or Iranian retaliation via activated sleeper cells or cyberattacks on US targets or even US territory.

Global trade: A supply shock at the worst possible moment

The Iran war is unfolding against a global trading system already strained by Trump's tariff offensive and the lingering fragmentation of supply chains since Covid and the war in Ukraine. The Strait of Hormuz is the single most important chokepoint in global energy trade, and it now sits in an active warzone.

Even without a formal blockade, the commercial consequences are already emerging: insurers are cancelling cover, shipping premiums are spiking, and vessels are re-routing or pausing transits. The knock-on effects extend well beyond energy. Gulf airspace closures are disrupting aviation corridors between Europe and Asia. Houthi reactivation in the Red Sea would close the alternative routing valve that kept goods moving during earlier episodes of Hormuz tension.

The combination of higher energy costs, disrupted logistics, and a generalised confidence shock would constitute a meaningful drag on global trade volumes at precisely the moment the world economy was still digesting the inflationary and growth consequences of the tariff shock. The mother of all bad timings.

How the current energy supply risks compare to 2022

For oil and gas markets, there will likely be some parallels made with 2022 and Russia's invasion of Ukraine. The oil supply at risk from a successful blockade of the Strait of Hormuz is roughly 15-20% of global supply, depending on how much supply the Saudis can divert by pipeline to the Red Sea. This is significantly higher than the 7-8m b/d of Russian oil supply (which is around 7-8% of global supply) that was at risk during the early days of the Russia-Ukraine war, when we saw Brent spike to almost $140/bbl.

How the reaction in energy markets compares to 2022

However, helping to a certain degree at the moment is the fact that oil inventories are more comfortable than they were in the lead-up to Russia's invasion of Ukraine. OECD stocks are in the region of 200m barrels higher now than prior to the Russia/Ukraine war. Still, a two-week full blockade would essentially see this buffer disappear, leaving significant upside to prices.

For natural gas, as much as 125bcm of LNG flows are at risk, which is around 3% of global natural gas consumption, but 22% of global LNG trade. However, the roughly 15bcm that Oman exports will be at less of a risk, given cargoes don't need to navigate the Strait of Hormuz, but will still be in close proximity to danger.

In the lead-up to Russia's invasion of Ukraine, close to 160bcm of Russian gas (pipeline and LNG to the EU) was at risk. The market is relatively better positioned now, given the build-up of LNG export capacity, largely from the US. Since the beginning of 2025, we have seen around 40bcm of US capacity starting up, while a further 14bcm is set to start this year, and there will be significantly more in the years ahead. However, in the immediate term, capacity additions fall well short of potential Persian Gulf supply losses.

A tighter market would see Asia and Europe competing more aggressively for LNG cargoes, pushing up prices. Price-sensitive buyers in Asia will likely step back from the market, while Europe would likely not make the same mistake as it did in 2022, where buyers bought aggressively regardless of price levels.

In the eurozone – and similarly in the US – the labour market is another important way in which today differs from 2022. In the UK, for example, worker shortages were still widespread in 2022, which amplified the pass‐through from higher inflation to wage growth. The jobs market is now much cooler, so that mechanism should be far less pronounced. The same likely applies to the eurozone, judging by European Commission surveys showing fewer firms reporting labour shortages as a constraint on production.

At the same time, what is different from a macro perspective compared with 2022 is the fact that in 2022 most major economies looked resilient and governments, which had already introduced fiscal support during the pandemic, announced more measures to prevent too much of a purchasing power loss due to higher energy prices.

The US: Fighting a war that raises domestic prices

For the US, even though trade exposure to the Strait of Hormuz is limited, higher global oil prices would fuel the current cost-of-living crisis. US consumers are already stretched, and gasoline prices are acutely politically sensitive going into midterm territory. Higher oil prices would also complicate the Federal Reserve's future monetary policy path.

A second supply-side inflation shock, while the inflationary impact from tariffs is still unfolding, could make further rate cuts hard to justify, at least in the near term. At the same time, if the conflict drags and uncertainty weighs on business investment and consumer confidence, the growth outlook darkens too.

The one partial offset is that the US itself is a major oil producer; higher oil prices benefit the shale patch and improve the terms of trade for domestic energy, even as they hurt consumers. But that balance is politically awkward to explain and economically insufficient to compensate for the broader damage.

The eurozone: The most exposed major economy

Europe is where the macro consequences hit hardest, and the timing could not be worse. The eurozone was finally emerging from its long period of stagnation, with tentative green shoots of recovery emerging – though recently, these have been undermined by new uncertainty regarding tariffs. Now the region could face an energy shock on top of a trade shock.

Europe imports essentially all of its oil and a significant share of its LNG. A surge in energy prices and potentially even energy supply disruption could bring back memories of the energy cost crisis from late 2021 to 2023. There are currently two important differences compared with the situation back then: Europe doesn't have to 'derisk' from a single important energy provider, and the oil price crisis comes at the end of the winter, not the start. Whether eurozone governments will be able (and willing) to quickly offset any purchasing power losses via new fiscal support, however, is less clear. Fiscal capacities are more under pressure than in 2022.

The European Central Bank is caught in a genuine dilemma. Services inflation is still sticky, and an oil shock would push headline inflation higher – yet the growth outlook is simultaneously deteriorating under the combined weight of tariffs, uncertainty, and now energy costs. In December, ECB analysis showed that a 14% increase in oil prices and 20% in gas prices would push up inflation by 0.5ppt and could reduce GDP growth by 0.1ppt. However, this would only be the price effect, not the supply chain disruption effect. Given the still relatively fresh memories of the recent inflation surge, the ECB is unlikely to see any new oil price-driven inflation spike as transitory or even deflationary. However, to see a rate hike, the eurozone economy would have to show clear resilience.

Asia: Inflation and trade balances could come under strain

For now, Asia seems to be able to absorb the jump in oil prices, thanks to the low starting points, with inflation broadly in control in most of Asia. However, the severity and persistence of higher prices will ultimately determine the impact. If sustained, Asia is particularly vulnerable to oil price volatility because it relies so heavily on imports; except for Australia, Malaysia and Indonesia, all other economies run deficits in oil and gas trade, leaving them exposed when energy costs rise. If higher prices persist, three factors will shape the impact:

Heavy dependence on Middle Eastern oil: A significant share of Asia's crude supply comes from the Persian Gulf. Japan and the Philippines rely on the region for almost 90% of their oil needs, while China and India import roughly 38% and 46%, respectively. Any disruption in the Strait of Hormuz – a critical shipping lane – would restrict supply, potentially causing shortages that slow business activity and put pressure on manufacturing across Asia.

Trade balances under strain: Even without a physical supply disruption, higher global oil prices worsen trade balances and add to inflation pressures. Thailand, Korea, Vietnam, Taiwan, and the Philippines are the most exposed. A mere 10% rise in oil prices can deteriorate current account balances by 40-60 basis points. Prolonged increases would only deepen these deficits.

Strong inflation pass‐through: Because many emerging Asian economies have a relatively high weight of energy in their consumer inflation baskets, rising oil prices feed quickly into headline inflation. On average, a 10% increase in oil prices raises CPI inflation by about 0.2 percentage points.

Our base case had headline inflation across most of Asia rising in 2026 but still staying within most central bank targets. But a price shock of this magnitude – if it lasts – would likely push inflation above target ranges and increase the pressure on central banks to tighten policy sooner rather than later.

MENAFN05032026000222011065ID1110824032