BEIJING, March 4 (Xinhua) -- The global economy could be plunged into a dire situation as U.S.-Israel strikes on Iran, unfolding over the weekend, will deal a heavy blow to global energy supply, trade and equity market, analysts have warned.
MARKET LOSSES
Following the start of the strikes, major world stock markets were gripped by the escalating tensions in the Middle East, sending indices into negative territory.
In Asia, Japan's Nikkei stock index briefly lost 3 percent on Wednesday morning, extending its losses, amid concern that the conflict could drag on, with the Strait of Hormuz, a key waterway for oil and gas transportation, effectively shut down.
South Korean stocks opened sharply lower on Wednesday, extending losses from the previous session's 7 percent plunge. The country's main bourse operator, the Korea Exchange, issued a sell-side sidecar for two consecutive days, suspending the selling of KOSPI futures.
In Europe, the DAX Index closed at 23,790.65 points, down 847.35 points, or 3.44 percent, on Tuesday. The FTSE 100 Index closed at 10484.13 points, down 295.98 points, or 2.75 percent, while the Paris CAC 40 closed at 8103.84 points, down 290.48 points, or 3.46 percent.
On the same day, U.S. key stock indices declined, with the S&P 500 Index closing at 6,816.63 points, down 64.99 points, or 0.94 percent, and the Nasdaq Composite Index closing at 22,516.69 points, down 232.17 points, or 1.02 percent. The Dow Jones Industrial Average closed at 48,501.27 points, down 403.51 points, or 0.83 percent.
SOARING OIL PRICES
What really matters for the market is oil -- its implications for inflation and the broader world economy.
A senior Iranian military advisor said on Monday that the country's armed forces will not let any oil be exported through the Strait of Hormuz.
Ebrahim Jabbari, an advisor to the chief commander of Iran's Islamic Revolution Guards Corps (IRGC), made the remarks in an interview with state-run IRIB TV while warning that the country's armed forces will take action against any movement by oil tankers through the Strait of Hormuz, a shipping route carrying one-fifth of oil consumed globally.
Earlier, Iranian media reported that the IRGC had closed the strait to shipping, declaring the vital oil and gas waterway unsafe due to U.S. and Israeli attacks.
"War in Iran could cause the biggest oil shock in years," The Economist warned. The benchmark Brent crude oil contract gained 1.2 percent in early trading on Wednesday to 82.45 U.S. dollars per barrel, its highest since July 2024, and has gained 14 percent since Friday.
Also, a widening Middle East conflict looks set to create the most significant disruption for gas markets. Iran's neighbors, including Qatar, are some of the world's most important producers, and the region is also a vital supply route, with 20 percent of liquefied natural gas exports traveling through the strait, analysts said.
The U.S. think-tank Council on Foreign Relations said oil acts as a foundational feedstock, and disruptions will likely lead to high inflation and significant economic downturns.
"Escalating conflict in the Middle East, particularly involving Iran, poses a severe threat to global energy supplies. Disruptions in the Strait of Hormuz could cause major oil price spikes, significant inflation, and knock-on effects on the global economy," it said.
Market traders said that oil prices will continue to hike if the war persists, with oil prices increasing 20 percent in case of a supply cut from Iran. If the strait is closed, oil prices will likely exceed 100 dollars per barrel, with India, Japan and European countries bearing the brunt.
In the euro area, traders priced a small chance of a European Central Bank rate hike this year, and Chief Economist Philip Lane said that a prolonged war in the Middle East could cause a substantial spike in eurozone inflation and reduce economic growth.
WORST SCENARIO
Capital Economics, a London-based macroeconomic research consultancy, expects that a prolonged conflict affecting supply could cause oil prices to jump to around 100 dollars, potentially adding 0.6-0.7 percentage points to global inflation.
According to Citigroup, a sustained 10-dollar-per-barrel oil shock could aggressively de-anchor inflation expectations across emerging markets, hitting countries with low foreign exchange reserves hardest. Argentina, Sri Lanka, Pakistan and Türkiye are most exposed to sudden capital outflows.
Türkiye is highly dependent on imported oil and natural gas, with any disruption or even the perception of disruption in supply routes expected to push prices upward, directly widening the current account deficit, Mustafa Sonmez, an Istanbul-based economist, told Xinhua.
An oil spike to 100 or 110 dollars per barrel would significantly increase Türkiye's external financing need and exacerbate the country's inflation rate, Sonmez said.
Senol Babuscu, a banking expert at Ankara's Baskent University, said inflationary pressures could emerge through both direct and indirect channels.
"When households anticipate higher fuel and food prices, they adjust spending behavior, and businesses adjust pricing strategies," Babuscu told Xinhua. "This can accelerate the inflationary cycle."
They said that the overall impact on the economy would depend on the scope and duration of any confrontation.
The London-based ICIS (Independent Commodity Intelligence Services), a global provider of petrochemical, energy, and fertilizer market information, looked at three scenarios of the Iran crisis and their impact on the global economy.
In the best case, where the shock is contained, there will be a mild drag on global growth and a temporarily higher inflation, but the world economy will keep expanding.
In the medium case, which assumes persistent disruption and slower global growth, the global economy will weaken noticeably, with softer industrial output, higher inflation, and risk-averse financial markets, but still not a downturn on the scale of 2008 or 2020.
In the worst case, where there is a sustained chokepoint and infrastructure damage, a global recession is the central outcome, driven by high energy prices, supply chain breakdowns, and collapsing consumer spending.
For the U.S. economy, even though trade exposure to the Strait of Hormuz is limited, higher global oil prices would fuel the current cost-of-living crisis. U.S. 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, ING Group said.
"Every 10-dollar-per-barrel sustained rise in oil prices can knock off 10 to 20 basis points of growth over the next 12 months," said Ajay Rajadhyaksha at Barclays, adding that if oil stayed at 120 dollars, the United States and the world economy would take a considerable hit. ■
