A major new uncertainty now hangs over the economic outlook after the weekend attacks on Iran. The markets have responded as would be expected, with oil and gas prices rising, share prices down and cash moving to safe havens like gold.
But these are just initial knee-jerk reactions. Like the rest of us, investors and analysts are trying to work out how long this conflict will last, how far it will spread and what it will mean. The scale of the reaction so far is notable but not too large – but this can change quickly. The risks are of higher inflation and slower growth in 2026 but everything depends on how the war evolves.
More fundamental market moves could follow and act as a dangerous conduit to the real economy, upending forecasts for 2026. But for now we just have to wait and see how it all plays out.
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Oil prices have been the traditional route through which conflict in the Middle East affects world economies. Dependence on oil – and on the Middle East as a supplier – may now both be a lot less than back in the 1970s oil shocks. According to Paul Nicholson, head of investment strategy at Davy “ The current backdrop is very different from past periods when oil shocks triggered recessions, due in part to stronger US shale production, greater diversification of supply and strategic reserves in key regions.”
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While Iran supplies around 3 per cent of the world’s oil itself, the greater concern is the disruption to supply through the Strait of Hormuz, the only sea passage out of the Persian Gulf through which around 20 per cent of world supply is shipped, with large amounts going via this route to China and India. It is also the route through which liquefied natural gas is exported by United Arab Emirates and Qatar, who are responsible for around 20 per cent of global production. A lengthy blockage of supplies through this route would have a serious economic impact and drive prices significantly higher.
The other major concern is damage to energy infrastructure in the gulf. An Iranian drone attack on a major Saudi Arabian oil refinery on Monday, forcing it to close for now, will rattle nerves and shows how Iran is trying to draw others into the conflict.
Brent crude oil prices, the international benchmark, rose by as much as 13 per cent this morning and in afternoon trading were around $77 a barrel, up about 7 per cent.
European gas prices were up 22 per cent in early trading but, illustrating the uncertainties the market now faces, Iranian attacks on Qatar, which led it to stop LNG production, sent prices soaring higher by lunchtime and in afternoon trading they were up by more than 40 per cent on the day.
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The vital issue now is the length of this conflict and how much it disrupts supply. Iran’s ability to continue to disrupt shipping and degrade energy infrastructure across the Gulf region is unknown, but will be the key factor. Its attacks on the Saudi and Qatari facilities on Monday clearly show it is aware of this vulnerability..
Higher oil prices, if sustained, will start to feed through at the pumps and to home heating prices quickly enough, though we will have to see how wholesale prices evolve before being clear about the likely timing and scale of any rise. Higher gas prices would also feed through to bills in the months ahead, though so far, at around approaching $45 a megawatt hour they remain well below the $100 plus they traded at for much of the period after the Russian invasion, when they actually peaked over $300. The likely impact on home energy prices will increase the political tensions in Ireland about the Government’s decision to abandon once off household energy credits in the last budget.
There is also the wider economic impact. There is widespread disruption to travel worldwide through airports such as Dubai and Abu Dhabi – vital transit routes to Asia and Australia – and airline shares are down sharply this morning. Air freight has also been upended and sea freight for a range of products is also having to reroute, with major freight companies adding emergency additional charges. As during the pandemic, these kind of disruptions, if sustained, can damage complex supply chains, slow delivery and increase prices.
A lot now hangs on the duration of this conflict. World energy stocks could deal with temporary disruption, but a prolonged closure of the Strait of Hormuz or damages to key infrastructure would be another matter. In turn higher energy prices for consumers and businesses would be a direct economic cost to energy importers like Ireland and disrupted trade flows could also push up prices. Consumer and business confidence could be hit, again damaging for a small, trading country like Ireland.
Higher inflation and lower growth are a bad combination – back in the 1970s the word was “stagflation.” In a note to clients this morning, Goodbody economist Dermot O’Leary said “the moves put central bankers in a tricky spot though, having to trade off the impacts on economic activity with the inflationary impact of higher energy prices.”
These economic threats will have a political impact on the key players, too – US president Donald Trump will not want to see a big economic hit. The economic outlook for 2026 is now on a knife-edge, reliant on an unpredictable war in the Middle East and whether it fizzles out quickly or drags on.
