For the past year, economists have modelled the impact of US President Donald Trump’s chaotic trade war. Now, it’s a real war they’re assessing.
The most immediate impact from the escalating West Asia conflict is through market reaction as investors take flight to safe havens such as the dollar and gold, while stocks slump. That leaves smaller economies — especially those with scant foreign exchange reserves — vulnerable.
The main transmission mechanism to the world economy is via oil. Brent rallied as much as 13 per cent to above $82 a barrel — the highest since January 2025 — while West Texas Intermediate was near $72 in early Asia trading on Monday.
Iran supplies about 5 per cent of global oil, and a complete outage would lift the price by about 20 per cent, Bloomberg Economics’s Ziad Daoud and Dina Esfandiary wrote in a report before oil started trading in Asia. Furthermore, about 20 per cent of global oil supply transits through the Strait of Hormuz, and if that’s shut prices could spike to as much as $108 per barrel, they warned.
If sustained, those higher oil prices would hurt major importers including China, Europe and India, while beneficiaries would include exporters such as Russia, Canada and Norway, the BE analysts wrote in a note. As for the US, consumers would lose out as higher fuel costs squeeze incomes, but the economy overall faces less of a drag as shale has made it an oil exporter.
Of course, much will depend on what happens in coming days, weeks and months. In a separate note, BE analysts said they expect Iran’s response will continue to escalate.
“While it can’t match the US’s military superiority, Iran can impose significant costs and seek to bog the US down in the region,” Daoud and Esfandiary along with Becca Wasser and Jennifer Welch wrote.
For a global economy that’s been muddling through Trump’s tariff rollout and growing uncertainty over the impact of Artificial Intelligence on labour markets, the latest spike in West Asia tensions adds yet more uncertainty.
Chinese refiners would be impacted if Iranian barrels are disrupted, given they import an estimated 99 per cent of Iranian exports, equivalent to about 13 per cent of Chinese seaborne crude imports in 2025, according to analysts at TD Securities including Rich Kelly.
“The Middle Kingdom would lose another source of cheap barrels,” they wrote. “Russia stands to benefit with Indian and Chinese demand likely shifting toward heavily discounted Urals, which would ease some pressure on the Kremlin from decreased crude pricing.”
After US and Israeli military strikes on Iran killed the Islamic Republic’s Supreme Leader Ayatollah Ali Khamenei, Chinese Foreign Minister Wang Yi on Sunday called it “unacceptable to openly kill the leader of a sovereign country and institute regime change.”
Coming about a month before President Xi Jinping is set to host Trump in Beijing, any deterioration in US-Chinese ties risks disrupting a trade truce that has calmed investors on both sides of the Pacific Ocean.
If broader market upheaval is sustained, those with fewer buffers may prove vulnerable. Analysts at Citigroup say countries with low FX reserves, such as Argentina, Sri Lanka, Pakistan and Turkey, “face heightened risks of sudden capital outflows and currency depreciation.”
In a bid to shield the currency, the Turkish central bank announced suspension of its one-week repo auctions due to developments in financial markets, according to a statement by the monetary authority.
Turkey is also vulnerable to swings in market sentiment due to its trade links with Iran, according to Robin Brooks, who publishes the Shadow Price Macro Substack. “Iran is a tiny economy, but — at the margin — markets will see this as another reason to be negative on Turkey,” he wrote.
As for central banks, they’re likely to take a measured approach for now.
“What complicates the near-term further is that there will be a broad-based increase in global uncertainty, which may feed through into the demand side of the economy while inflation expectations pick up,” the TD Securities analysts wrote. “This argues for patience initially, but a willingness to react if and when the situation stabilizes in the Middle East.”
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