Any extension of the conflict in Iran risks causing an unprecedented crisis in energy supply that will eventually affect every segment of the global economy.
However, it is clear that some countries are either more exposed to this impact or less equipped to deal with it. Here are the economies to watch closely.
THE MAJOR POWERS OF THE G7 Attention first turns to Europe. A new energy shock revives painful memories of Russia’s invasion of Ukraine four years ago. This event highlighted Europe’s dependence on imports and propelled inflation to double digits.
GERMANY – Its heavily industrialized economy has more to lose from an energy price spike. Its manufacturing sector just stopped contracting for the first time since 2022. As an exporter, Germany is also exposed to any global slowdown.
The extensive stimulus program announced by Berlin last year will help cushion some of the shock, but the room for additional support is limited by the expected budget deficits in the coming years.
ITALY – It also hosts a significant manufacturing sector. Additionally, oil and gas account for a large part of its primary energy consumption in Europe.
UNITED KINGDOM – Its electricity production is more reliant on gas-fired power plants than other major European economies. Gas prices almost always dictate electricity prices in the UK, and they have been rising faster than oil prices since the start of the war.
Capping energy prices will limit the initial inflationary impact. The risk is that it could lead to interest rate hikes, leaving the UK with the highest borrowing costs among the G7 countries for an extended period, amid rising unemployment. Fiscal tensions and pressure on the bond market limit its options to support businesses and households.
JAPAN – Also on the front lines, the archipelago gets about 95% of its oil from the Middle East, with almost 90% transiting through the Strait of Hormuz.
This situation adds to inflationary pressures already induced by the weak yen, affecting food and basic necessities prices, given Japan’s strong reliance on raw material imports.
THE HEAVYWEIGHTS OF EMERGING MARKETS
The Gulf region will inevitably suffer a direct economic backlash. Some forecasters already anticipate an economic contraction in the region this year, reversing pre-war growth prospects.
The surge in oil and gas prices is of no help if the effective closure of the Strait of Hormuz prevents countries – notably Kuwait, Qatar, and Bahrain – from shipping their hydrocarbons to international markets.
The conflict could also impact expatriate workers’ remittances to their families, injecting tens of billions of dollars into local economies every year.
INDIA is another heavyweight at risk. It imports about 90% of its crude oil and nearly half of its liquefied petroleum gas (LPG). Around half of this oil and an even higher proportion of its LPG must pass through the Strait of Hormuz.
Economists are already revising the country’s growth forecasts downward, and the rupee has hit a historic low. In Indian restaurants and homes, hot dishes and drinks – including samosas, dosas, and chai tea – are disappearing from menus as soaring gas prices lead to informal rationing.
TURKEY – Sharing a border with Iran, it braces for a potential influx of refugees and increased geopolitical uncertainty. However, the significant economic impact has been mainly felt at the central bank level.
The central bank relives past inflationary crises and had to halt its rate-cut cycle for the second time in a year, selling up to $23 billion of its precious reserves to support its currency.
VULNERABLE ECONOMIES There are a handful of countries that seem particularly vulnerable, all having recently gone through – or are on the verge of – major economic crises.
SRI LANKA recently designated Wednesday as a holiday for government employees to limit energy costs. Schools, universities, and public institutions are closed, non-essential public transport is suspended, and drivers must now register to obtain a “National Fuel Pass” restricting fuel purchases.
PAKISTAN, which teetered on the brink two years ago, raised petrol prices and closed schools for two weeks. Government agencies see their fuel allocations halved, are banned from buying new air conditioners or furniture, and are required to immobilize part of their vehicle fleet.
EGYPT – Besides the soaring fuel and staple food costs, the country faces the prospect of a sharp drop in Suez Canal and tourism revenues, with the latter bringing in nearly $20 billion last year. Servicing debt, mostly denominated in US dollars, has become even more difficult due to a drop of over 9% in its currency since the conflict began.
