The escalating Middle East conflict is sending shockwaves through the global economy, raising widespread fears of a return to 1970s-style stagflation. Following weekend attacks by the United States and Israel on Iran, international markets are grappling with severe supply chain disruptions and surging energy prices. As the crisis deepens, the economic fallout is stretching far beyond regional borders, threatening to derail growth and push inflation sharply higher across the world.
As the Middle East conflict continues, energy markets have become the immediate focal point. Brent crude briefly surged past $100 a barrel, capping a roughly 70% increase since the beginning of the year and marking its steepest daily jump since the early days of the 2020 pandemic. Simultaneously, European wholesale gas prices have reached their highest levels in over three years. Economists warn that this energy shock is creating a challenging macroeconomic environment characterized by stubborn inflation, weakening economic growth, and limited policy options.
Oil Market Risks and the Strait of Hormuz
Industry leaders are sounding the alarm over the fragility of global energy supplies. Saudi Aramco Chief Executive Amin H. Nasser recently warned that prolonged disruption to oil markets could have catastrophic consequences for the world economy, noting that approximately 180 million barrels of oil supply have already been disrupted.
At the center of these concerns is the Strait of Hormuz, a critical shipping chokepoint between Iran and Oman. Assessments of the strait’s exact volume vary slightly; according to Saudi Aramco’s CEO, almost 17% of the world’s oil supply passes through the corridor, whereas the US Energy Information Administration estimates that around one-fifth of daily global oil and liquefied natural gas production relies on the route. If this vital waterway becomes impassable, the consequences could be devastating. Goldman Sachs estimates that European benchmark natural gas futures could more than double if shipments through the strait are halted for over two months.
To mitigate potential supply shocks, Saudi Aramco is maximizing the use of its East-West pipeline, which has a capacity of 7 million barrels per day, to bypass the Strait of Hormuz. The company also maintains 2 million barrels per day of spare capacity alongside a global storage network to help absorb sudden interruptions.
Widespread Ripple Effects Across Global Trade
The crisis is straining global trade networks that spent the last year managing tariffs and other logistical hurdles. Shipping routes have been heavily disrupted as several major companies suspend services to the region, leading to container shortages and port congestion. India is already feeling the immediate impact, with more than 400,000 metric tons of basmati rice currently stuck at ports or in transit.
Air freight operations are also facing significant delays. Airspace restrictions and grounded flights have hampered global logistics. The International Air Transport Association notes that air freight carries roughly one-third of global trade by value. Combined, Middle Eastern carriers like Emirates, Qatar Airways, and Etihad account for about 13% of global air cargo capacity, meaning continued airspace restrictions could severely test the resilience of global supply chains.
Asian economies appear especially vulnerable to these trade and energy disruptions. Consultancy firm Capital Economics estimates that between 80% and 90% of the crude oil and liquefied natural gas traveling through the Strait of Hormuz is destined for Asia. If oil prices remain at current levels, inflation across many Asian countries could increase by roughly half a percentage point.
Threats to Food Production and Fertilizer Supply
Beyond energy and retail goods, the conflict poses a direct threat to global food security. The Strait of Hormuz is essential for the international fertilizer trade. According to Svein Tore Holsether, CEO of Yara International, around one-third of the world’s exports of urea—a widely used fertilizer—pass through the strait. Nearly half of global food production depends on fertilizers, making any disruption highly damaging to future agricultural yields.
The impact on agricultural inputs is already visible. Data from CRU Group shows that Egyptian urea prices surged 35% in just a single week. Prices for sulphur, another key fertilizer ingredient heavily sourced from the Middle East, have also risen sharply.
Central Banks Face a Difficult Balancing Act
Prior to the latest weekend attacks, the International Monetary Fund had projected global economic growth of 3.3% for this year. While the IMF has not yet revised this forecast, Deputy Managing Director Dan Katz warned that the expanding conflict could deeply impact a range of economic metrics. IMF research indicates that every sustained 10% increase in oil prices typically reduces global economic output by 0.1 to 0.2 percentage points.
This dynamic places central banks in a difficult position as they face the uncomfortable trade-off between stabilizing prices and supporting growth. A 5% rise in oil prices usually adds about 0.1 percentage points to inflation in developed economies. In the United States, Goldman Sachs projects that sustained high oil prices could push consumer inflation from 2.4% in January to 3% by year-end, which would complicate the Federal Reserve’s ability to cut interest rates. Meanwhile, in Europe, Berenberg bank’s chief economist Holger Schmieding noted that a months-long conflict could raise consumer inflation by more than one percentage point and reduce European Union economic growth by up to half a percentage point.
Financial markets are reacting swiftly to these pressures. Investors are scaling back bets on interest rate cuts in Europe and the United Kingdom, while short-term government bond yields have risen. Although the United States may be somewhat more resilient due to its substantial domestic energy production, recent data showing an unexpected decline in February employment suggests that the American economy remains exposed to the broader stagflation risks.
