How the Israel-Iran flare-up is impacting the global economy

Companies that rely heavily on fuel costs, such as airlines and cruise lines, experienced some of the steepest declines. American Airlines, United, and Delta all dropped by more than 4% in US trading, while their European counterparts, including Air France-KLM and IAG, the parent company of British Airways, also slid by more than 3%. Carnival and Norwegian Cruise Line were down 4.9% and 5%, respectively.

Immediate airspace closures over Israel, Iran, Iraq, and Jordan meant airlines had to take costly, time-consuming detours, but for defence contractors, it was a good day. Shares in Northrop Grumman, Lockheed Martin, and RTX all jumped by more than 3%, with increased defence spending now seen as more likely.

Safe-haven assets like gold climbed even further than they have recently, up 1.4%, reaching $3,432.60 an ounce, close to its two-month high. However, while Treasury bond prices typically rise in nervous markets, they fell slightly this time, which pushed their yields higher. That is unusual and likely reflects worry that an oil spike could stoke inflation. JPMorgan analysts believe that if oil reaches $120 a barrel, the US Consumer Price Index (CPI) could easily rise to 5%.

Regional effect

The Israel-Iran confrontation looks to have had an economic effect on nations right across the Middle East, including the Gulf states like Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar, for whom higher oil prices are welcome, but regional instability is not, because conflict scares off foreign direct investment (FDI) and tourists, with missiles being fired from Iran, Israel, and Yemen.

The Gulf states' thriving real estate sector would likely feel the pinch, and insurance premiums for ships navigating crucial regional waterways are expected to rise, squeezing profit margins and reducing trade volumes across the board.

Owing to attacks on ships from the Iran-backed Houthis in the Red Sea, shipping through the Suez Canal was already down before the latest Israeli-Iranian conflagration, which has been bad news for Egypt, whose transit fee revenue has plunged by 61% to less than $4bn in 2024 from more than $10bn in 2023.

Operators navigating routes between Asia and Europe have instead been ordering their vessels to take the long way, sailing around Africa instead. This adds up to two weeks to journeys, up to $2mn in extra fuel per trip, and a quadrupling of insurance surcharges from 0.5% of a shipment's total value to 2%. The Baltic Dry Index, which tracks dry bulk shipping costs, had already hit eight-month highs before the latest ructions.

The major shipping firms are now nervously assessing whether Iran's navy will block the Strait of Hormuz or establish "no-go zones" for commercial vessels, which would disrupt global supply chains and raise costs everywhere.

There could be an impact in Türkiye as well, given that it imports more than 90% of its oil and gas, making it vulnerable to any price spike. If Brent crude tops $90 per barrel for any sustained period, it could derail Turkish efforts to bring down inflation, which still sat uncomfortably high at 35.4% as of last month. Meanwhile, capital is flowing out, with Türkiye's credit default swap premiums climbing.  

A drag on growth

Across the region, tourism may be down. The sector accounts for up to 26% of income for countries like Lebanon, Jordan, and Egypt, and S&P previously estimated that conflict could cost the region $16bn in lost tourism revenue. Beyond the Middle East, a bigger worry is 'stagflationary' pressures (stubborn inflation plus stagnant economic growth). Higher energy prices push up costs from manufacturing to transport, and businesses pass these costs on.

The IMF's April 2025 outlook already had a growth downgrade for the Middle East and North Africa to 2.6% from a previous 4% forecast (trade tensions being among the factors). The Iran-Israel contretemps will push projections down further.

While the latest American CPI data showed a modest 0.1% increase from April to May, a sustained rise in energy costs from the Middle East could quickly reverse that trend, which will not help the US Federal Reserve, which is trying to bring inflation back down to its 2% target without crushing growth. If energy costs stay high, interest rate cuts could be delayed, making borrowing more expensive.

In its June 2025 Global Economic Prospects report, the World Bank had already trimmed its global GDP growth forecast for 2025 down to 2.3% from an earlier 2.8%, citing things like the "substantial rise in trade barriers" and instability. An Iran-Israel war may further push those projections down.

Effect on belligerents

Although its operations appear to have achieved some military goals, there is a huge cost to all this for Israel, where Israeli media reported that air strikes on the first day of the fighting (13 June) alone cost the government $1.5bn, adding to an already strained defence budget.

According to the Stockholm International Peace Research Institute (SIPRI), Israel's military spending surged by 65% to $46.5bn in 2024. This represents 8.8% of its GDP (gross domestic product), the second-highest percentage globally. Yet there is likely to be an impact of foreign direct investment, too, given the images of destruction in Israel being shown, and the advice from foreign governments not to travel there.

Israel's economy already shrank by 20% in late 2023 due to the call-up of 300,000 reservists. This hit production and exacerbated labour shortages. Credit rating agencies like Fitch and Moody's are mulling further downgrades, which would make it more expensive for Israel to borrow money. Yet the impact is nothing like as severe as it has been in Iran.

The Iranian economy has been under Western sanctions for decades, and began this war in a precarious position. Despite being OPEC's third-largest oil producer, pumping around 3.3 million barrels per day (bpd), Iran's actual sales are heavily restricted. China is its primary major customer, purchasing around 1.8 million barrels per day in recent months. The Central Bank of Iran reported that oil exports hit $67bn in their last fiscal year (ending in March 2025), a decade high, but Israel is reportedly targeting Iran's oil infrastructure in its airstrikes. 

This would be a painful blow for Tehran's bank balance. It would do nothing for the country's high unemployment rate and could make Iran's rampant inflation even worse. The International Monetary Fund (IMF) thinks inflation will jump from 32.6% in 2024 to 43.3% in 2025, on top of huge budget deficits of up to 25%. Oil is Iran's main form of foreign currency.

Shred of hope

Before the fighting, the US and Iran had been in talks over a new nuclear deal. This may now have been permanently derailed, but if it has not, then it could be an economic boon for Iran. The Obama-era Joint Comprehensive Plan of Action (JCPOA) of 2015 gave Iran's economy a noticeable, albeit temporary, boost.

With sanctions lifted, it increased its crude oil exports from about 1.1 million bpd to 2.5 million bpd a few months later. This helped create a global oversupply, pushing Brent crude prices below $30 a barrel in early 2016—good news for oil importers and consumers, less so for other oil producers.

If a new and lasting deal were to emerge, its effects could be enormous, unlocking billions of dollars in frozen assets and letting Iranian oil flow freely back into global markets, bringing in much-needed foreign currency to help tame inflation. The World Bank said a full lifting of sanctions on Iran could cut global oil prices by 13%, with Iran's own per capita welfare potentially rising by 3.7%.

Net oil importers, such as the EU and the US, could see their per capita welfare increase by 0.5% and 0.3%, respectively, while oil exporters, including the Gulf states, might experience a decline in their per capita welfare of 3.9% due to lower prices. But not many analysts currently think a US-Iran nuclear deal is imminent. For now, most people are aware that the Middle East is now a much more dangerous, volatile, and unpredictable place than it was a month ago. And that is bad news for most.