In what ways does the Middle East conflict affect global trade and growth?

“The ongoing conflict involving Iran, the United States and Israel has caused turbulence in the global economy. Roger Hosein and George Saridakis show how a geographically concentrated disruption can cascade through energy markets, trade systems and services, reshaping the global economic landscape. The latest escalation in the Middle East has triggered a sharp supply shock, beginning in oil and gas markets and rapidly rippling across the global economy. Brent crude, which had been trading in the mid-$60s to low-$70s range earlier in 2026, surged above $100 a barrel and briefly approached $120 as the conflict intensified, reflecting heightened risks to flows through the Strait of Hormuz. The waterway is a critical chokepoint , carrying roughly one-fifth of global oil supply. The surge in energy costs is already feeding into higher production expenses worldwide, weighing on output and pushing inflation higher. How will global trade be affected? Before the conflict, global trade had been on a modest recovery path following the disruptions caused by the COVID-19 pandemic and the Russia-Ukraine war. Merchandise trade volumes expanded by an estimated 4.5 per cent in 2025, exceeding expectations. Growth had already been forecast to slow to just under 2 per cent in 2026, but elevated energy prices and logistical disruptions are now likely to push that figure closer to 1.5 per cent. This shift underlines the sensitivity of global commerce to energy market volatility. Higher fuel costs raise transport and shipping expenses, while bottlenecks in key maritime routes constrain volumes, reinforcing the slowdown. Who feels the greatest impact? The Gulf economies are at the centre of the disruption. Prolonged constraints on shipping through the Strait of Hormuz could significantly reduce hydrocarbon export volumes, with output in more exposed economies, such as Qatar and Kuwait, potentially contracting sharply. This would represent their most severe downturn since the early 1990s. More diversified economies in the region, including Saudi Arabia and the United Arab Emirates, are better placed to absorb the shock but remain vulnerable. Lower export volumes and weaker external demand could translate into meaningful declines in growth, particularly if disruptions persist. Although most oil and gas transiting the Strait is destined for Asian markets , Europe remains highly exposed to global price movements. The European Union imports close to 60 per cent of its energy needs, and the Britain around 44 per cent. This reliance on imported energy exposes both regions to global price volatility and supply disruptions, which can disrupt economic activity and increase costs for households and businesses, even though only a minor share of these imports comes directly from the Gulf. The transmission mechanisms are both direct and indirect. Rising fuel costs put upward pressure on the price of traded goods, while supply disruptions reduce availability. Services trade is also affected, as aviation, logistics and tourism slow in tandem, producing a synchronised drag on global activity. Heightened uncertainty in financial markets may amplify the shock through higher risk premia, capital outflows and exchange rate depreciation. The Gulf’s role in fertiliser production amplifies these pressures. A large share of globally traded ammonia and urea originates from, or passes through, the region, while it is also a major exporter of sulphur, a key input for phosphate fertilisers. Disruptions therefore risk pushing up agricultural input costs and, in turn, global food prices . The region is also a significant supplier of helium , which is essential for medical imaging, scientific research and semiconductor manufacturing. Any sustained disruption would add to existing strains in high-tech supply chains. These cost pressures risk generating second round inflationary effects, particularly in import-dependent economies, while higher input costs may crowd out investment in more productive sectors. The result is a more constrained global environment characterised by weaker demand responsiveness and heightened volatility. The impact is asymmetric across countries, with developing economies facing a stronger external constraint due to higher import dependence, weaker diversification and limited policy buffers, while advanced economies are better able to smooth the shock through stronger institutions, deeper financial markets, and greater macroeconomic policy flexibility. What about tourism and aviation? The impact on aviation and tourism has been immediate. Thousands of flights were cancelled within days of the escalation, sharply reducing regional connectivity. Inbound tourism to the Middle East is projected to fall by between 11 and 27 per cent in 2026, implying tens of millions fewer visitors and tens of billions of dollars in lost revenue. Given the region’s role as a global transit hub (accounting for a significant share of long-haul connecting traffic) the disruption extends far beyond the Middle East. Major hubs such as Dubai and Doha are critical nodes in international aviation networks, meaning reduced capacity has cascading effects on global travel and air freight. There are, however, signs of resilience. Past episodes suggest that tourism demand can rebound relatively quickly once routes stabilise and traveller confidence returns, reflecting the sector’s high short-term elasticity. Some smaller, open economies, such as Curacao and Aruba, may see a temporary boost from diverted travel flows. Yet any gains are likely to be offset by rising fuel costs, which increase airfares and operating expenses. Short-term benefits are therefore counterbalanced by medium-term pressures from imported inflation and weaker global demand. Which firms are most vulnerable to the shock? At the firm level, the impact of the shock is heterogeneous, with large firms generally better positioned to absorb cost increases than small- and medium-sized enterprises (SMEs). This reflects their access to stronger financial reserves, more diversified supply chains and greater pricing power, allowing partial pass-through of rising input costs. By contrast, SMEs operate with tighter margins and limited liquidity, making them more vulnerable to increases in energy and transport costs; if sustained, these pressures may force output contraction or market exit. Prolonged uncertainty also suppresses investment across firms, constraining capital accumulation and weighing on medium-term productivity growth. Export oriented firms face an additional competitiveness shock. Higher shipping and fuel costs raise unit export prices, while weaker external demand compresses volumes. Even in energy exporting sectors, disruptions to logistics and supply routes may offset price gains. Import dependent firms are similarly affected, as rising input costs increase the domestic currency cost of intermediates and final goods. Where pass through is incomplete, profit margins are squeezed, potentially resulting in reduced output, higher prices or substitution toward less efficient domestic production. Can policymakers offset the shock? The broader macroeconomic implications are significant. Higher energy prices are expected to shave around 0.3 percentage points off global growth, reinforcing a stagflationary dynamic in which inflation rises even as output slows. The IMF has likewise downgraded its global growth outlook, highlighting broader downside risks from elevated energy costs and geopolitical uncertainty. Crucially, this is a supply-driven shock , limiting the effectiveness of conventional policy tools. Monetary easing risks exacerbating inflation, while fiscal support may prove costly and difficult to target. The episode illustrates how geographically concentrated disruption can cascade through energy markets, trade systems and services, reshaping the global economic landscape . The result is a more fragile environment, marked by slower growth, higher inflation and elevated uncertainty, a combination that will test policymakers in the months ahead. While this analysis has focused on economic dynamics, an earlier resolution of the conflict would benefit not only economic stability but also human welfare, mitigating the profound loss of life and suffering that extend beyond financial considerations. This article gives the views of the author, not the position of LSE Business Review or the London School of Economics. You are agreeing with our comment policy when you leave a comment. Image credit: StreetOnCamera_Comeback provided by Shutterstock. The post In what ways does the Middle East conflict affect global trade and growth? first appeared on LSE Business Review .

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