S&P: Middle East tensions may hit global growth, oil prices if conflict escalates

Dubai: Global growth forecasts for 2025 and 2026 have been revised higher by S&P Global Market Intelligence, thanks to easing trade tensions and better financial conditions. But the outlook remains highly uncertain—particularly if the Israel-Iran conflict intensifies.

In its latest June Global Economic Forecast, S&P Global warns that any disruption to oil flows from the Gulf—such as a closure of the Strait of Hormuz—could dramatically shift energy prices, inflation rates, and growth prospects for much of the world.

“While financial markets have remained calm so far, a serious escalation would materially impact the global economy,” said Ken Wattret, Vice-President of Global Economics at S&P Global Market Intelligence.

At the time of writing, Brent crude oil prices hovered around $76 per barrel, up $8 from just before the missile exchanges. Equity markets and bond yields have reacted only modestly so far, while demand for safe-haven assets like gold and the Swiss franc has risen slightly. But this calm, S&P says, may not last.

S&P’s scenario modelling, using its Global Link Model, suggests that any disruption in energy supply from the Gulf would deliver large output losses in the Middle East, Asia-Pacific and Europe.

The Strait of Hormuz is a critical shipping route, through which around 20% of global oil supply passes. Any prolonged closure could cause oil prices to spike, push inflation higher, and tighten financial conditions globally—especially in oil-importing countries.

While the geopolitical impact is the big wild card, the report also highlights that global growth is already below potential, even before accounting for such risks. That’s due in part to weak post-election business sentiment in the US and lingering effects from tariff uncertainty.

Interestingly, many economies posted stronger-than-expected growth in Q1 2025. S&P attributes this to the front-loading of exports ahead of higher tariffs, particularly after the "reciprocal" tariff tensions in late 2024. But this artificial boost is already starting to fade, the report notes.

Despite the pickup, overall 2025–2026 projections are still below pre-November 2024 levels—the last US election cycle—reflecting caution in investment and consumption across major economies.

Even with recently mild US inflation figures, the Federal Reserve remains cautious, according to S&P. CPI data may not fully reflect tariff-related pressures yet, as many businesses are still working through older inventories or absorbing costs via reduced margins.

However, producer price data and S&P’s own PMI indicators suggest that pipeline price pressures are building in the US.

Meanwhile, the US dollar’s depreciation—which had resumed before the recent Middle East flare-up—is seen as another important factor. A weaker dollar can help ease monetary conditions abroad, potentially offsetting some of the trade and geopolitical risks.

S&P expects the dollar to remain under pressure due to concerns over slower US growth, fiscal imbalances, and waning global appetite for US assets.

In summary, while the global economic picture for 2025–2026 looks better than it did a few months ago, it remains fragile. The Middle East remains the key risk zone that could tip financial and energy markets into turbulence.

If tensions remain contained, improved trade relations and softer financial conditions could help support a gradual global recovery. But any escalation—especially involving oil routes—could quickly reverse the trend.