New York : The supply shockwaves from the US and Israel’s war in Iran are spreading across the global economy, raising concerns about an inflation hit to companies and consumers that will require policymakers to raise borrowing costs.
While President Donald Trump’s chaotic tariff campaign took months to filter through supply chains, the spiking prices for oil, gas, aluminum, fertilizers and chemicals since the bombing of Tehran began on February 28 have rapidly been felt by factory managers, farmers and freight carriers.
Now the effects are reaching industries that might’ve seemed insulated from the fallout, or too far away to feel it. And that’s unlikely to be reversed soon even as Trump signalled a potential cease fire on Monday.
A ‘grace period’ for Iran
As the economic strains widen and financial markets slump, Trump appears to be looking for an offramp. On Monday he postponed for five days a deadline for Iran to reopen the Strait of Hormuz, citing ongoing talks to de-escalate hostilities. His move spurred a sharp fall in Brent crude and a rebound in US equities and Treasuries.
Impact on fuel, energy
To conserve fuel in Pakistan, fans of its top cricket tournament were instructed to stay home and watch matches on television.
For cash-strapped governments, there’s little scope for stimulus to cushion the blow. Fuel subsidies in economies such as Indonesia risk undermining fiscal balances, with emerging economies facing the biggest economic blow. While the blunt instrument of tighter monetary policy can seek to limit pressures that lead to inflation, interest rates hikes on top of surging energy bills would deliver a double hit to households.
Hit to Indian films
In India, the spillovers are already spreading beyond the front lines of the energy problems.
In Bengaluru, producers of the 6 billion rupee ($65 million) “Toxic: A Fairy Tale for Grown-ups” have delayed release from March to June for fear of missing out on cinema goers across the Gulf region—a huge market for Indian films due to its vast South Asian diaspora. The film set in the coastal paradise of Goa where a powerful drug cartel pulls the strings behind a facade of sun-soaked beaches. The delay meant the March 19-22 Eid holiday passed without a major Indian film release for the first time since 2020.
“The current uncertainty, especially in the Middle East, has created a situation that impacts our goal to reach and connect with the widest possible audience,” lead actor and co-producer Yash, who goes by his first name, wrote on X.
Movie business analysts have warned that box office collections in the Gulf region could decline by 20% to 25% as a result of the war. Others peg the combined losses in the UAE-GCC market at close to $15 million.
Depriving India of its oil
India is among the economies most exposed to the war’s fallout as it imports about 90% of its crude oil and nearly half of its liquefied petroleum gas. About half of its crude and over three-fourths of LPG imports pass through the Hormuz strait. From factories to restaurants and delivery drivers, the gas shortages are being felt, with the southern city of Pune even halting the use of LPG for cremations.
The impact on prices and growth isn’t linear, said Madhavi Arora, economist at Emkay Global Financial Services.
“Oil and gas supply constraints are now impacting demand and operational capacities across industries,” she said.
“Growth could face headwinds through several transmission channels: softer consumption as household purchasing power erodes; constrained government spending as possibly higher oil subsidies complicate fiscal deficit management; and weaker investment as elevated input costs compress corporate margins and profitability.”
Whining winemakers
For Francesco Scala, a third-generation winemaker in Calabria, a 60% jump in the price of diesel couldn’t come at a worse time. He’s sending out tractors to prepare the soil for the growing season, with intense farming taking place from April through mid-July, when the heat kills off mildew and other pests and his Gaglioppo and Greco Bianco grapes can mostly take care of themselves. “Everything will be more expensive,” Scala said.
Even with diesel available to farmers tax-free from the government, he worries about the affordability of producing everything from wine to pasta. The fuel price pressures are hitting growers and winemakers at the same time as Trump’s tariffs. And because wine sales have been slowing not just in the US but around the world, Scala said he’s probably going to have to swallow the higher costs himself.
“If we put one euro more on the price, I’m sure that we will sell less wine,” he said.
What’s in it for global trade?
The World Trade Organization last week warned its forecast for a 1.9% increase in the volume of global goods trade this year would be at risk if the Middle East war keeps energy prices elevated for a sustained period. International services would be hurt, too, given the expected increase in airfares and cargo rates.
“The Middle East is a transportation hub and a tourism hub, and those services are very important to the global economy,” WTO chief economist Robert Staiger told Bloomberg Television on Friday.
If the high-intensity war continues and Hormuz remains blocked for the next few weeks, a Bloomberg Economics model puts oil at close to $110 a barrel, with damage spreading across the global economy.
Such an outcome would cut UK and euro-area GDP by about 0.5 percentage point and lift inflation by 1 percentage point, BE finds. In the US, the impact concentrates on prices with inflation around 0.7 percentage point above the pre-war path.
“If the war stretches on for three months — less likely, in our view — oil could approach $170 a barrel,” according to the BE analysts. “At that level, the shock intensifies and the economic damage to growth and inflation is nearly doubled.”
“The market is looking for an offramp, the market is looking for a ceasefire,” Bank of America strategist Michael Hartnett said in an interview on Bloomberg Television.
Financial conditions have been tightening, but the Fed will find it tough to address the squeeze if oil prices are high, he added.
