Counting the cost of the Israel-Iran war

In Asia, refiners were already feeling the pinch. Japanese and South Korean importers reported delays of up to two weeks, while margins were compressed due to soaring input costs and pricing volatility. Before Israel's air strikes, global logistics firms were already navigating the Houthi militia's missile attacks on commercial vessels in the Red Sea that had led many shipping firms to reroute around Africa.

Shipping and supplies

According to the Drewry World Container Index, average global container rates have increased by more than 40% since late May, reaching $3,527 per 40ft container in early June. This surge was particularly notable on routes to New York, which spiked 81% over six weeks, despite a subsequent pullback. Maersk reports an average 12-day increase in Asia-Europe shipment times, while the Baltic Dry Index has climbed over 35% since early June.

These disruptions not only inflate transport costs but also risk cascading inventory shocks, especially in automotive, electronics, and pharmaceutical supply chains. Aviation across the Middle East has been disrupted, with the skies becoming a high-risk zone.

Major US, European, and Arab airlines suspended or rerouted flights to avoid affected airspaces, resulting in cancellations, detours, increased fuel consumption, and traveller delays. The ripple effect extended to air freight, with several Middle Eastern airlines reducing frequencies or rerouting, causing rates from Asia to Europe to surge by 15% during the fighting.

Concurrently, the maritime sector had a shock. In Egypt, congestion intensified at the ports of Damietta and Alexandria, as importers rushed to secure essential components. The region's other major ports, including those in the Arabian Gulf and along the Red Sea, face increased delays due to heightened security measures and the reallocation of shipping routes to avoid perceived danger zones.

In the longer term, as airlines prioritise safety, more fuel-efficient aircraft could be seen, driving demand towards alternative hubs like Istanbul or those in the Caucasus, while maritime sector risks could spur greater investment in resilient overland trade routes to bypass volatile chokepoints.

Financial markets

Investor behaviour has reflected classic wartime patterns: a dash for safe havens, a tilt toward defence assets, and deepening regional divergences. The Chicago Board Options Exchange Volatility Index (CBOE VIX) jumped by more than 20% in June. Gold prices soared past $2,550 an ounce shortly after Israel attacked Iran, before retreating to around $2,400.

US equities dipped 1.2% but later rebounded as markets reassessed direct war risks, while US and European defence stocks outperformed. Northrop Grumman and BAE Systems were up, and Lockheed Martin surged 3.6%, while Delta, United, and American Airlines all fell by up to 4.7%. European carriers, such as Lufthansa and Air France-KLM, are warned of margin compression due to fuel cost inflation and potential rerouting.

Emerging markets bore the brunt. The Morgan Stanley Capital International Emerging Markets (MSCI EM) index has underperformed global equities by over 4% in June, led by sharp declines in Middle Eastern and South Asian exchanges. In Türkiye, the lira hit a 10-month low against the dollar, and the Istanbul bourse saw $1.2bn in foreign outflows in the second week of the conflict alone.

Looking ahead, markets are on edge as investors weigh the risk of further escalation and the possibility of drawn-out instability in key energy and trade corridors. Despite violations, the ceasefire looked to be holding. If the warring parties resume hostilities, central banks—particularly in emerging markets—will increasingly intervene to stabilise currencies and dampen inflationary pressures.

A prolonged crisis could accelerate long-term shifts in global capital allocation away from geopolitical hotspots and toward perceived 'neutral' economies, potentially redrawing the investment map of the next decade.

Macro implications

The World Bank has revised its 2025 global growth outlook down from 2.8% to 2.3%, citing "heightened geopolitical instability" and "prolonged supply disruptions." In its June update, the International Monetary Fund (IMF) cautioned that "energy-price driven inflation shocks" could derail soft landing trajectories in advanced economies.

In Europe, inflation had begun to moderate, but the war could rekindle price pressures. The European Central Bank (ECB) has paused its rate cuts, and futures now imply fewer than two reductions before the end of the year. In Asia, the Bank of Japan faces renewed yen depreciation, and analysts expect the Bank of Japan (BoJ) to deploy foreign exchange (FX) reserves to prevent capital flight.

In emerging markets, central banks are torn between controlling inflation and protecting growth. India's Reserve Bank has already postponed rate cuts, while Egypt's central bank is expected to raise rates again in July despite a fragile recovery.

Inflation pass-through from energy and transport is proving especially persistent. In South Korea, headline inflation has rebounded to 3.6%, while in Indonesia, food and fuel costs are surging. The cascading effect of energy inflation is threatening to extend the global monetary tightening cycle well into 2026.

Winners and worriers

In the Arab world, the economic fallout is mixed and highly asymmetric. Oil-exporting countries in the Arabian Gulf, such as Saudi Arabia, the UAE, and Kuwait, have enjoyed short-term windfalls. However, maritime insurance for Arabian Gulf shipments has doubled, leading oil buyers to seek alternative suppliers in West Africa and the Americas increasingly. In the long term, market confidence in Arabian Gulf supply chains may erode, slowing down investment and diversification plans.

Oil-importing Arab states are in a far more precarious position. Egypt imports almost a third of its fuel needs. It can ill afford to further strain an economy already grappling with a balance-of-payments crisis, currency devaluation, and IMF-imposed austerity. Jordan and Tunisia face similar pressures.

In Lebanon, where public finances are in disarray, rising oil prices fuelled inflation and compounded currency depreciation pressures. Household energy costs have increased, particularly with the introduction of a new tax on fuels. This is prompting Arab capitals to accelerate energy transition efforts, from solar and wind to nuclear.

A new energy order

Beyond the immediate headlines, the war may act as a catalyst for longer-term shifts in global energy architecture. China and India, the world's largest oil importers, want a new maritime security framework to reduce dependence on the Arabian Gulf. China is particularly interested in safeguarding tanker passage via the Strait of Hormuz, as 41% of its oil imports pass through it.

Energy diversification is once again in vogue. Europe has spent three years weaning itself off Russian gas and is now doubling down on green investments, hydrogen projects, and liquified natural gas (LNG) import infrastructure. The International Renewable Energy Agency (IRENA) believes the current crisis could "accelerate the tipping point" toward clean energy investment in developing markets.

In Washington, the Trump administration is reportedly considering the release of additional barrels from the Strategic Petroleum Reserve (SPR) to curb gasoline prices ahead of the 2026 midterm elections. It is also seeking to re-engage diplomatically with Iran, though formal overtures remain unlikely in the current climate.

As the world watches events unfold, one lesson is clear: energy security is again shaping the arc of global economics and geopolitics. The recent Israel-Iran war is not just a regional flashpoint; it is a mirror reflecting the fragility, complexity, and interdependence of the modern global economy.