Market Reaction to the Israeli Attack
The economic impact of Israel’s attack on Iran’s nuclear and ballistic rocket facilities was swift. Oil prices surged, and investors turned to safe-haven assets, including government bonds and gold. Crude oil futures rose by up to 13% as dealers bet that Israel’s attack would not be a one-time event. The Brent Global Benchmark for oil prices rose by more than 10% to $75.15 per barrel, reaching its highest price in almost five months.
A war between the two enemies sparked fears of a lengthy conflict, with Israeli Prime Minister Benjamin Netanyahu stating that the military operation would "take as many days as needed to remove this threat" and warning Tehran that it would develop nuclear weapons. The head of Iran, Ayatollah Ali Khamenei, warned that Israel should expect "hard punishment" for its strikes.
Asian and European shares fell, with Germany’s Dax index being hit the hardest. The S&P 500 and Nasdaq later opened about one percentage point lower on Friday as dealers continued to pour into safer investments. The travel and leisure sector was hit hard in Europe, while energy shares and defense giants, including Rheinmetall and BAE, rose between 2-3%.
Immediate Economic Effect
The attack had an immediate impact on the global economy. Israel and Iran, along with Iraq and Jordan, closed their airspace, and several airlines canceled flights to the region, fearing that the conflict could down an aircraft. Redirecting flights is a costly exercise, as it increases travel times and requires aircraft to use additional fuel.
Israeli airlines were forced to move some of their aircraft from Ben Gurion Airport in Tel Aviv to overseas locations. Flight tracking data showed several jets leaving Tel Aviv on Friday morning, with some being flown to Cyprus and elsewhere in Europe without passengers. The Israeli Shekel currency fell against the dollar by almost 2% on Friday as Israel announced a "special situation," which apparently boosted panic.
Greatest Economic Threat
A comprehensive war between Israel and Iran could disrupt energy markets and trade routes in the region, having a ripple effect worldwide. The Middle East is an important global oil production region, with some of the largest oil reserves and producers in the world. Iran is the third-largest oil producer in the region, behind Saudi Arabia and Iraq.
Despite international sanctions against its oil exports, Iran still delivers significant amounts of crude oil to China and India. The street of Hormuz, a narrow waterway between Iran, the United Arab Emirates, and Oman, is a critical choke point for global oil trade. If it were closed, as Iran has threatened several times, oil tankers would be stranded, and oil prices could increase even higher.
Global Economic Impact
The Israel-Iran tensions are escalating at a time of increased uncertainty on financial markets, driven by US President Donald Trump’s on-again, off-again tariff policy. The risk of steep tariffs on imports to the United States has already disrupted global trade and worked to investors’ disadvantage. These tariffs have slowed costs for consumers and companies and economic activity worldwide.
A longer conflict between Israel and Iran could worsen this pressure, as each 10% increase in oil prices reduces global economic growth by about 0.4%. A multi-front conflict, involving Iranian groups such as Hezbollah in Lebanon or the Houthis in Yemen, could paralyze shipping and tourism. Disruptions to regional gas supply, including the Israeli Tamar field or Gulf exports of liquefied natural gas (LNG), would also put pressure on European and Asian energy markets.
The Israeli economy is already burdened by the continued Gaza conflict, and a broader war with Iran could possibly increase costs to $120 billion or 20% of GDP. Iran remains in an economic crisis due to international sanctions over its nuclear program, which have limited its oil exports. The Iranian rial remains weak, and inflation is stubborn at around 40%. Any further disruption to oil exports would have far-reaching consequences worldwide.
