War in iran threatens global economy

The recent escalation of conflict between Israel and Iran has sent shockwaves through the global energy market, with far-reaching consequences for the world's Economy.

Energy infrastructure under attack

In late March, both Israel and Iran launched strikes against gas fields in the Persian Gulf, marking the most dramatic escalation yet in the Iran war. By targeting upstream energy infrastructure, the belligerents have ensured that the war's impact will be felt globally long after the conflict ends. Even if the newly announced ceasefire holds and the war wraps up quickly, it could take up to five years to rebuild the damaged infrastructure. If the ceasefire fails and the war continues, the risk of further destruction grows, exacerbating the crisis.

This has triggered a classic driver of inflation: excess demand for limited resources. Almost immediately, U.S. markets began betting that the Federal Reserve would increase interest rates, its most direct tool for fighting inflation. This will hit American consumers hard, as higher borrowing costs on car loans and mortgages, combined with rising energy prices, will push up the cost of goods across the board.

Global debt crisis looms

But the impact won't stop at U.S. borders. Most countries' outstanding debts are still denominated in U.S. dollars, making rising American interest rates a major concern. And it's not just those owing dollars to U.S. financial institutions or the IMF that need to worry – even countries that have borrowed heavily from China will see their debt burdens increase. This hidden cost of the war will fall hardest on the world's poorest nations, many of which are already struggling with historic levels of sovereign debt.

Low-income countries are particularly vulnerable, with the share of those in debt distress having more than doubled in recent years, from 24% in 2013 to 54% in 2024. As the global debt crisis deepens, the question of burden sharing across bondholders and Chinese banks will come into sharp focus. There are no obvious solutions, but one thing is certain: the sooner the war ends, the sooner the world can turn its attention to easing this economic distress.