Global Economy Faces New Stress From Iran Conflict – TT

Over the past year, economists have followed the trade war tactics of US President Donald Trump. Now, it’s a real battle they’re exploring.

The main fallout from the escalating conflict in the Middle East is through market action as investors fly to safe havens like the dollar and gold, while stocks decline. That leaves small economies – especially those with little foreign exchange – at risk.

The main transport route to the country’s economy is through oil. Brent rose as much as 13 percent to above $82 a barrel – the highest since January 2025 – while West Texas Intermediate was near $72 in early Asian trading on March 2.

Iran supplies about 5% of the world’s oil, and a complete shutdown would raise prices by 20%, Bloomberg Economics’ Ziad Daoud and Dina Esfandiary wrote in a report ahead of oil sales in Asia. Furthermore, approximately 20% of the world’s oil travels through the Strait of Hormuz, and in the case of closed prices it can rise to 108 dollars per barrel, they warned.‎

If sustained, higher oil prices would hurt major exporters including China, Europe and India, while beneficiaries include exporters such as Russia, Canada and Norway, BE analysts wrote in a note. In the case of the US, consumers would lose out as higher oil prices squeeze income, but the economy faces a deficit as shale has forced oil exports.

Of course, a lot depends on what happens in the coming days, weeks and months. In another note, BE analysts said they expect Iran’s response to continue to rise.

“Even if it doesn’t match the size of the US military, Iran can charge money and seek to undermine the US in the region,” Daoud and Esfandiary along with Becca Wasser and Jennifer Welch wrote.

For the global economy that has been disrupted by the release of Mr. Trump’s tariffs and the growing uncertainty about the impact of Artificial Intelligence on labor markets, the recent escalation in the Middle East conflict increases uncertainty.

Chinese refiners will be affected if Iran’s barrels are disrupted, given that they account for an estimated 99 percent of Iran’s exports, equivalent to 13 percent of Chinese exports by sea in 2025, according to analysts at TD Securities including Rich Kelly.

“The Middle Kingdom would lose yet another source of cheap barrels,” they wrote. “Russia should benefit from India’s and China’s potential shift to reduced Urals, which will relieve the Kremlin from lower prices.”

After the US and Israeli military strike on Iran killed the Supreme Leader of the Islamic Republic Ayatollah Ali Khamenei, Chinese Foreign Minister Wang Yi on March 1 called it “unacceptable to publicly kill the president and initiate a regime change.”

Coming nearly a month before President Xi Jinping welcomes Trump to Beijing, any deterioration in US-Chinese relations risks derailing a trade deal that has calmed traders on both sides of the Pacific Ocean.

When market volatility is elevated, those with limited buffers may prove risky. Analysts at Citigroup say that countries with low FX, such as Argentina, Sri Lanka, Pakistan and Turkey, “face greater risks of rapid liquidity and liquidity fluctuations.”

In a bid to protect the currency, Turkey’s central bank announced the suspension of its one-week auctions due to developments in the financial markets, according to financial officials.

Turkey is vulnerable to market volatility due to its trade relationship with Iran, according to Robin Brooks, publisher of the Shadow Price Macro Substack. “Iran is a small economy, but – on the edge – the market will see this as another reason not to do badly on Turkey,” he wrote.

As for central banks, they can take a measured approach now.

“What complicates the near term is that there will be increased global volatility, which could weigh on economic demand while inflation expectations rise,” wrote TD Securities analysts. “This contradicts tolerance at first, but willingness to act when things are stable in the Middle East.”