7 Global Economic Implications of the Israel–Iran–U.S. War

The sudden military conflict between Israel and Iran, with the United States involved, is affecting the global economy. Governments, investors, and businesses are closely monitoring the situation, assessing potential risks and long-term consequences. 

Rising oil prices, shifts in international relations, and heightened economic uncertainty are influencing financial markets and policy decisions worldwide. 

Here are 7 Global Economic Implications of the Israel-Iran-U.S. Conflict:

1. Rising Energy Prices

Oil prices are going up quickly because of the conflict. Brent crude oil jumped 14% in one day, reaching $79 per barrel before settling at $74—the biggest increase since 2022. Experts say this is due to fears that oil production and transport may be disrupted.

The Strait of Hormuz, a key shipping route for oil, could be affected, making things worse. Natural gas prices are also rising. Some companies have stopped operations for safety, and fuel costs for consumers could increase. If tensions stay high, countries may look for other energy sources.

Now, the war has changed everything. Oil prices are going up, which could make gas, heating, and transportation more expensive. Usually, banks raise interest rates to stop inflation, but the conflict is also hurting business confidence and slowing down economic growth. Lower interest rates would help businesses, but higher interest rates would control prices.

Central banks now have a hard choice: Should they stop inflation or support the economy? Early signs show that many banks might delay cutting interest rates for now. The U.S. Federal Reserve and the European Central Bank will need to rethink their plans based on how rising oil prices affect the economy.

2. Global Inflationary Pressures Mount

A sharp increase in oil and gas prices is hitting the global economy at a difficult time. Before this crisis, inflation was slowing down in many countries, bringing hope that living costs would stabilise. Now, that hope is fading.

Higher energy costs directly affect consumer prices, making gasoline, electricity, food production, and transportation more expensive. Economists warn that the oil price surge is a “bad shock for the global economy at a bad time”, raising concerns about stagflation,a mix of slow growth and rising prices.

“A higher oil price can lead to a classic stagflationary shock, undermining economic growth while fueling inflation,” explains Mohamed El-Erian, a well-known economic advisor. This means consumers could pay more for essentials just as businesses face higher costs, possibly slowing investment and hiring.

Policymakers worldwide are worried. A top German economic institute warns that higher oil prices will hurt economic growth “at an unfavourable time,” noting that rising fuel costs affect people more directly than central bank decisions.

In developing countries, where households spend a lot on food and energy, the impact is even stronger. Many governments help cover fuel and food costs, but rising prices strain national budgets, forcing tough choices like cutting spending or taking on more debt.

El-Erian’s outlook is grim: “Whatever way you look at it, it’s negative short term, it’s negative longer term.” Simply put, the conflict is driving global inflation higher, and if tensions persist, it could weaken economies for an extended period.

3. Trade Routes and Supply Chains Under Threat

Important trade routes in the Middle East are at risk, especially the Strait of Hormuz, where about 20% of the world’s oil is transported. If Iran blocks this area, oil supplies could drop sharply, pushing prices even higher. Shipping companies and insurers are already preparing for problems. 

Air travel has also changed, flights are avoiding the conflict zone, which affects cargo shipments. If the fighting spreads to nearby regions, other key trade routes could be impacted, making global trade slower and more expensive.

This conflict is creating uncertainty in the world economy. Rising energy prices, inflation, and trade problems could continue if tensions remain high. Everyone is watching closely to see what happens next.

4. Currency Changes and Safe Investments

When war and uncertainty strike, people try to protect their money. This is happening with the Israel-Iran-U.S. conflict, as investors move their funds to safer places.

The U.S. dollar, known for being strong in difficult times, has gone up in value. The dollar index rose 0.4–0.6%, showing that people trust it more during the crisis. Other safe currencies, like the 

Japanese yen and Swiss franc also increased at first but later slowed down. Investors prefer to keep their money in stable currencies when things feel uncertain.

However, riskier currencies have fallen. The euro and British pound dropped as people worried about the economic effects of the conflict. Some developing country currencies, such as the South African rand and Mexican peso, also lost value.

These currencies had been strong before, but now investors are pulling back due to fears of higher oil prices and global instability.

Meanwhile, gold is rising in value. Gold prices went up by 1%, nearing a record high of $3,500 per ounce, as people rushed to buy it. Other safe investments, such as U.S.

Treasury bonds are also in high demand, lowering interest rates to about 4.3%. When uncertainty increases, people prefer gold and bonds because they seem more secure than stocks or riskier assets.

5. Trouble for Developing Countries

Many developing nations are struggling because of this conflict. Rising oil and food prices make life harder, especially for countries that depend on imports.

Investors are pulling money from riskier markets, making it tougher for nations like Egypt and Pakistan to borrow funds. Their currencies are also losing value, making imports more expensive.

Stock markets in places like India and Brazil could face problems, while oil-importing nations may see higher fuel costs. Even oil-producing countries like Nigeria might earn more, but they still face trade and security risks.

Overall, this crisis is putting extra pressure on economies that were already struggling to recover.

6. Defence Spending and Industry Booms 

Whenever geopolitical tensions flare, the economic fortunes of the defence sector tend to rise. The Israel-Iran hostilities are no exception: investors quickly signalled that they expect military expenditure to increase. 

Defence and aerospace stocks jumped in many markets for example, shares of BAE Systems, a major British weapons manufacturer, shot up nearly 3% in London, making it the top gainer on the FTSE 100 index. The reasoning is straightforward: a protracted conflict could lead to a greater demand for weaponry, ammunition, and security technology. 

Israel will need to replenish its arsenal and might seek additional advanced munitions or defence systems (often sourced from the U.S. and allies), while Iran may turn to its partners for military resupply.

Neighbouring countries, feeling less secure, might boost their own defence budgets as a precaution. Already, the mere fear of escalation has led markets to price in rosy prospects for contractors and arms exporters.  

7. Central Banks May Face a Dilemma 

Before the conflict started, central banks were thinking about lowering interest rates since inflation was slowing down. Some experts even expected rate cuts to help the economy grow.

Now, the war has changed things. Oil prices are rising, which could make gas, heating, and transport more expensive. Normally, banks raise interest rates to control inflation, but the conflict is also weakening business confidence and slowing growth, which might call for lower rates instead.

Central banks now face a tough choice: control inflation or support growth. Early signs show they may pause rate cuts for now. The U.S. Federal Reserve and European Central Bank must rethink their plans to see how the rising oil prices will affect their economies.