THE global economy is fundamentally weak.
Significant structural weaknesses such as decelerating productivity growth, ageing demographic, persistent budget deficit, high public and corporate debt, rigid, inefficient labour or product markets in advanced and emerging economies suggest their vulnerability to a sustained period of external shocks and uncertainties.
This is compounded by financial markets volatility, geopolitical fragmentation and trade, climate change effects, artificial intelligence and digitalisation adoption challenges.
While the International Monetary Fund has estimated global growth at 3.3% for 2026 and 3.2% for 2027, it is below pre-pandemic historical averages of 3.8% per annum in 2000-2019. The current global outlook is more moderate due to ongoing geopolitical tensions, policy uncertainty, and trade barriers.
Over the past six years, the global economy has been impaired by multiple systemic shocks.
It began with the US-China trade war in 2019 (Donald Trump’s first tenure as president of the United States), the Covid-19 pandemic in 2020, Russia-Ukraine war in 2022, Israel-Hamas war (October 2023 to 2024), a wider scale of tariffs shock under Trump’s second term in 2025. Now, in late February, the US-Israel attacks on Iran, sparking concerns over a deepening regional conflicts in the Middle East.
Each event has had profound and far-reaching economic consequences, disrupting global supply chains, caused severe volatility in energy and financial markets, and forced a recalibration of fiscal and monetary policies.
These events had triggered economic downshifts, cautious capital investment spending, measured pace of consumer discretionary spending, including travel and heightened inflation due to both energy and food shocks.
The US-Israel attacks on Iran may be different from past episodes of the Middle East conflicts. It became clear that they threaten to engulf the region in a longer and deadlier war.
Over the past 50 years, oil price shocks had occurred, either briefly or for a longer period, depending on the severity of supply disruptions and duration of the war. Oil price swings during geopolitical crises ranged between 25% and 300%.
We observe a consistent pattern in oil prices during major wars, particularly in the Middle East, characterised by immediate oil price surged at the start of the crisis due to fears of supply disruption and potential blockage of key shipping routes like the Strait of Hormuz.
The market panicked as investors are embedded in a geopolitical risk premium. Crude oil prices overreacted with upward spikes followed by a gradual stabilisation as trade flows re-routed and geopolitical tensions de-escalated.
The war between the US-Israel and Iran may have serious economic consequences on the global economy and the effects will depend on how severe the crisis becomes and how far the conflict will spread in the Middle East.
The connection between geopolitical instability in the Middle East and global energy prices is profound and immediate due to the region’s central role in the world’s energy supply system.
The Middle East is a dominant global energy powerhouse, holding 48% of the world’s proven oil reserves and over 40% of natural gas reserves. The region provides around 30% of global oil production and 17% of natural gas, with key players like Saudi Arabia, Iraq, United Arab Emirates, Iran, and Kuwait.
The Strait of Hormuz is one of the world’s most important shipping routes, handling 30% of the world’s total oil passes (about 15 million barrels per day or bpd of crude oil) and 20% of global liquefied natural gas trade, making it the most critical oil chokepoint globally.
Conflict often threatens to shut down or disrupt this narrow passage. Any sustained disruption would remove a substantial portion of globally traded crude from the market.
Eight Organisation of the Petroleum Exporting Countries and allies (Opec+) agreed to a modest oil output boost of 206,000 bpd for April amid the ongoing war on Iran. While additional production will provide limited immediate relief, it stopped short of a more forceful increase, that is to open its tap aggressively at this stage.
This suggests that Opec+ is walking on a tightrope between responding to near-term geopolitical risk and managing spare capacity carefully to avoid oversupply later.
Strategic petroleum reserves by major oil importing countries could moderate the oil price shock, but releases take time and cannot fully substitute for Gulf crude grades.
Blocking the Strait of Hormuz could further inflate the cost of goods and services worldwide, and hit some of the world’s biggest economies, including China, India, Japan, and South Korea, which are among the top importers of crude oil passing through the waterway.
While the energy intensity of major economies has continued to decline, driven by technological advancements, shifts in economic structure, and increased energy efficiency, and renewable energy, we must not too complacent about the economic risks this war creates.
The effects would likely reach consumers globally as higher energy and gas prices, costlier airline fares, and rising shipping costs that feed into the price of food and goods. Tankers’ rerouting, insurance repricing, and naval risk zones drive up freight rates across both container and bulk shipping, significantly impacting global logistics.
At the onset of the war, taking cue from the past major wars, global stock markets are expected to experience wide swings in prices as investors initially felt that the impact of the war could be contained. But as an increasing risk of escalation of the war in the region and outside the region would create unease.
This uncertainty causes volatility in global financial markets and erodes investors’ confidence, leading to a sharp correction in asset prices.
The impacted sectors are tourism, hospitality, and travel, logistics and transportation, agriculture, financial sector, manufacturing and industrial sector.
The sectors that would benefit from the war are defence and aerospace, energy and commodities, healthcare and pharmaceuticals.
Persistent energy prices and elevated raw material costs inflicted by the Middle East tensions could be a significant driver of cost-push inflationary pressures.
Higher inflation risks would force global central banks to change their narratives – reconsider, maintain, or tighten their monetary policies to prevent inflationary expectations from becoming entrenched. Higher short-term interest rates, in turn, can push up government bond yields.
Gold, which has been on years-long tear, got a boost initially when the war started as investors embraced bullion as safe haven investment.
Similarly, the US dollar gained some renewed interest as a deepening conflict in the Middle East prompted a flight to safety.
For now, US Treasuries remain a primary safe-haven asset as investors turn to for an “insurance policy” against volatility when times get uncertain.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
