US strikes on Iran come at fragile moment for the global economy

US Strikes on Iran Come at Fragile Moment for the Global Economy

US strikes on Iran’s three main nuclear facilities come at a fragile moment for the global economy, and the outlook now hinges on how forcefully the Islamic Republic retaliates.

The World Bank, the Organization for Economic Cooperation and Development and the International Monetary Fund have all downgraded their global growth forecasts in recent months. Any significant increases in oil or natural gas prices, or disturbances in trade caused by a further escalation of the conflict, would act as yet another brake on the world economy.

“We’ll see how Tehran responds, but the attack likely puts the conflict on a escalatory path,” Bloomberg Economics analysts including Ziad Daoud wrote in a report. “For the global economy, an expanding conflict adds to the risk of higher oil prices and an upward impulse to inflation.‎”

The rising geopolitical risks intersect with a potential escalation in tariffs in the coming weeks as President Donald Trump’s pauses of his hefty so-called “reciprocal” levies are due to expire. The biggest economic impact from a prolonged conflict in the Middle East would likely be felt via surging oil prices.

Post the US strike, a derivative product that allows investors to speculate on price swings in crude oil surged 8.8% on IG Weekend Markets. If that move were to hold when trading resumes, IG strategist Tony Sycamore said he projects WTI crude oil futures will open at around $80 per barrel.

Much will hinge on near-term events. Iran’s Foreign Minister Abbas Araghchi said the US attacks are “outrageous and will have everlasting consequences.” He cited the United Nations Charter on provisions for self-defense and said Iran reserves all options to defend its sovereignty, interest and people.

In the extreme scenario in which the Strait of Hormuz is shut, crude could soar past $130 per barrel, according to Daoud, Tom Orlik and Jennifer Welch. That could take US CPI near 4% in the summer, prompting the US Federal Reserve and other central banks to push back the timing of future rate cuts.

About a fifth of the world’s daily oil supply goes through the Strait of Hormuz, which lies between Iran and its Gulf Arab neighbors such as Saudi Arabia.

The US is a net exporter of oil. But higher crude prices would only add to the challenges the US economy is already facing. The Fed updated economic projections last week, marking down its forecast for US growth this year to 1.4% from 1.7% as policymakers digested the impact on prices and growth of Trump’s tariffs.

As the largest buyer of Iranian oil exports, China would face the most obvious consequences from any disruption to the flow of petroleum, though its current stockpiles may offer some respite.Any disruptions to shipping through the Strait of Hormuz would have a significant impact on the global liquefied natural gas market too.

Qatar, which makes up around 20% of the global LNG trade, uses this route for exports and has no alternative passage. That would leave the global LNG market extremely tight, pushing European gas prices significantly higher, Bloomberg Economics has noted.

While investors may be concerned that supplies could be interrupted if hostilities escalate, OPEC+ members, including de facto group leader Saudi Arabia, still have abundant spare capacity that could be activated. In addition, the International Energy Agency may choose to coordinate the release of emergency stockpiles to try and calm prices.

“The Middle East tensions represent another adverse shock to an already weak global economy,” Ben May, director of global macro research at Oxford Economics, said in a report ahead of the latest escalation. “Higher oil prices and the associated rise in CPI inflation would provide central banks with a major headache.”