Economists Warn of Underestimated Global Economic Risks from Prolonged Iran Conflict

Economists are expressing concern that markets may be underestimating the potential global economic impact of a prolonged conflict in Iran. Frederic Schneider, a senior fellow at the Middle East Council on Global Affairs, stated, "In my view, markets are underestimating the risk of a prolonged war." He warned that if the conflict continues and energy prices rise sharply, the consequences could become severe, potentially leading to an economic slump combined with interest rate hikes to curb inflation. Such a scenario could trigger the bursting of asset bubbles and potentially lead to another debt crisis similar to the one seen in 2008.

A significant portion of the economic risk centers on the Strait of Hormuz, a narrow waterway linking the Gulf to global energy markets. Approximately a fifth of the world's oil supply passes through this strait, along with a substantial share of liquefied natural gas shipments crucial for energy security in Asia and Europe. Schneider emphasized, "The Strait is the most important global chokepoint for hydrocarbons and fertilizers and a key transshipment hub between Asia and Europe," adding that even limited disruption there can quickly affect prices worldwide.

Beyond energy markets, the conflict could impact less obvious sectors. Helium, produced as a by-product of natural gas extraction, is essential for semiconductor manufacturing and medical imaging equipment. Qatar accounts for roughly a third of global helium supply, and disruptions could affect technology and healthcare industries far beyond the Middle East. Similarly, sulfur, another by-product of hydrocarbon production used in copper processing and other industrial activities, could become harder to source if energy supply chains are disrupted.

Agriculture may also face pressure if the conflict disrupts fertilizer production or trade. Schneider noted that the timing of the war is particularly sensitive, as the current planting season is underway in many parts of the world. Reduced fertilizer supply during this period could lead to smaller harvests later in the year and higher food prices.

Even if the fighting itself proves relatively short-lived, some economic damage may linger. Repairing damaged infrastructure and bringing shut-down energy capacity back online could take several months, prolonging supply bottlenecks across multiple industries. The conflict may also reshape how businesses view the region, with global shipping companies reassessing the risks of operating in the Persian Gulf, and investment, tourism, and international talent becoming more cautious about returning to the area.

Rising energy prices could complicate the task of central banks, which have spent the past two years trying to bring inflation under control. Sustained increases in oil and gas costs could push prices higher again, forcing policymakers to delay interest rate cuts or even tighten monetary policy. If the war drags on, the economic consequences could become far more severe, potentially creating conditions for stagflation—a rare combination of high inflation and weak economic growth that is difficult for policymakers to manage. The Gulf region, Europe, East Asia, and many developing economies would likely face the greatest pressure under such a scenario, although even the United States could feel the impact despite its growing energy independence.