FX.co ★ Middle East conflict: three major threats to global economy

Surge in oil prices

The armed conflict in the Persian Gulf has already triggered a sharp spike in oil prices amid mounting fears of supply disruptions. The primary concern centers on the Strait of Hormuz, a critical chokepoint through which about 20% of the world’s oil passes daily. If the strait is closed or even partially restricted, the global market could face a severe shortage of crude. Even without an actual blockade, the mere escalation of hostilities is rattling traders, fueling price hikes, and intensifying inflationary pressure on the global economy.

Pressure on equity markets

Geopolitical instability has had an immediate impact on global stock exchanges. Investors are locking in profits, pulling out of risk assets, and reallocating capital into safe-haven instruments. Amid rising uncertainty, technology, tourism, and consumer segments are taking the hit, while defense and commodity assets are gaining ground. Further escalation of the conflict could trigger a broad capital flight from emerging markets, intensify sell-offs, and destabilize financial systems in economies that rely heavily on external flows.

Risk of stagflation

A surge in energy prices amid geopolitical turmoil is raising the specter of stagflation, a mix of high inflation and slowing economic growth. Escalating oil prices are driving up production and transportation costs, eroding consumer purchasing power, and undermining demand. This threatens to stall the global recovery that followed the pandemic and the 2022 energy shock triggered by the Russia-Ukraine war. Further escalation could lead to a prolonged period of pricing pressure and sluggish business activity.