Middle East uncertainties cloud global recovery

Nearly five months into the latest round of tensions between the United States and Iran, prospects for renewed negotiations remain dim. The prolonged standoff has pushed up crude oil and gasoline prices, fueling concerns over regional stability and clouding the outlook for the global economic recovery, experts said.

Escalating hostilities between the United States and Iran could reignite inflation, drive up interest rates and weigh heavily on global economic growth, World Bank Chief Economist Indermit Gill warned.

The World Bank lowered its global growth forecast for 2026 to 2.5 percent in a report released in June and outlined a worst-case scenario reflecting prolonged instability in the Middle East.

However, in an interview on July 21, Gill said the worst-case scenario, in which hostilities persist for six months or longer, is already close to becoming reality. Under that scenario, global growth could slow to as low as 1.3 percent, while global headline inflation would climb to 4.5 percent.

Prolonged fighting and damage to oil infrastructure in the Middle East would also deepen food insecurity by disrupting shipments of fertilizer, helium and sulfur needed in agriculture, setting off a chain of secondary effects that could include higher interest rates, Gill said.

If the Strait of Hormuz remains blocked or the Middle East region continues to face heightened security risks, the disruption could send shock waves through global energy markets and the broader world economy, experts said.

Brian Coulton, chief economist of Fitch Ratings, told China Daily that the Middle East accounts for a substantial share of global oil production and exports. Thus, instability in the region can have far-reaching repercussions for global trade, supply chains, shipping and financial markets.

"The rise in inflation due to the energy shock will reduce consumption growth by squeezing real wages. There are also downside risks from an equity price correction, which could have a negative wealth effect on consumer spending," he said.

Alloysius Joko Purwanto, an energy economist at the Economic Research Institute for ASEAN and East Asia in Jakarta, said that if the crisis persists, global economic growth is likely to come under increasing pressure.

"First, governments will cut their spending to maintain a reasonable level of their budget deficits, and second, households should also reduce their consumption. The shrinking values of these two variables should be the main drivers of the global GDP drop," he said.

For the global economy, higher energy prices and imported inflation would weigh on consumption and manufacturing, particularly in energy-importing economies such as those in South Asia and parts of Europe, said Ding Long, a professor at Shanghai International Studies University's Middle East Studies Institute.

Pressure on trade

Rising costs in the petrochemical, transportation and logistics sectors will also disrupt global supply chains, placing renewed pressure on businesses and trade, he said.

"Some manufacturing and agricultural sectors have already been affected. For instance, some chemical producers in Southeast Asia have declared 'force majeure' following the closure of the Strait of Hormuz, making it impossible to maintain normal production and supply," said Purwanto.

Force majeure implies an event or effect that cannot be reasonably anticipated or controlled.

The spillover effects of the US-Iran conflict are expected to reach far beyond the Middle East, weighing on economic recovery in other parts of the world over the longer term, said Yang Guang, an assistant professor at the Institute for International and Area Studies at Tsinghua University.

Countries in the region that are closest to the conflict and depend on the strait for trade and energy shipments — particularly the Gulf's oil-producing nations — will bear the brunt of the disruption. Air travel across the region is also expected to be affected, dealing a further blow to economies that rely heavily on tourism and other service industries, he said.

Besides, import-dependent economies in East Asia, along with countries in Southeast Asia, South Asia and Africa that have limited fiscal buffers will be particularly vulnerable to the fallout, he added.

Agencies contributed to this story.