Middle East geopolitical developments and economic impact

Renewed attacks on Gulf oil and industrial infrastructure, alongside increased tensions around the Strait of Hormuz, have kept global markets on high alert. Although some shipping has partially resumed through the Strait, it is operating under strict, politically controlled conditions rather than free transit.

Consequently, global oil flows remain constrained, slower, more costly, and highly uncertain due to delays, increased insurance premiums, and geopolitical restrictions. In response, markets and policymakers have reacted with heightened volatility and risk pricing. Major institutions such as the International Monetary Fund and World Bank have begun coordinating their response to these energy and economic challenges, while central banks have issued explicit warnings about significant economic headwinds stemming from higher energy costs and ongoing supply chain disruptions.

Strait of Hormuz restrictions: Effectively closed to free commercial transit, the Strait of Hormuz is experiencing minimal, tightly controlled traffic, resulting in significant oil supply losses and delays in global trade.

Prolonged energy disruption: Attacks on energy infrastructure indicate enduring disruptions; even a rapid reopening of the Strait will not immediately restore flows due to damage to key facilities.

Divergent global policy responses: Policymakers globally are adopting varied fiscal and support measures to address the economic shock. Higher-income economies are adopting expansionary support, while constrained lower-income nations rely on targeted subsidies and spending reprioritization.

Widespread global price impacts: The global price shock is affecting energy, food, and everyday costs, disproportionately impacting energy-importing and lower-income countries.

Weakening global growth outlook: Geopolitical tensions are prompting downward revisions to global growth forecasts.

Regional economic slowdown: The GCC region is experiencing a broad economic slowdown, with PMIs signalling contraction in Saudi Arabia and Qatar. Meanwhile, the UAE remains in expansionary territory, albeit at a significantly slower pace.

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