Global economy under strain as Iran conflict disrupts critical supply routes
The military conflict that erupted in the Gulf region in late February has delivered what economists are calling the largest energy supply shock on record, threatening to derail the global economic recovery and pushing inflation higher across both developed and developing nations.
Diane Swonk, Chief Economist at KPMG US, discussed the mounting economic pressures stemming from the conflict during an interview about the crisis's far-reaching implications. Swonk, who regularly briefs the Federal Reserve and has advised the Congressional Budget Office, brings extensive expertise to the analysis after serving in senior economic roles at Grant Thornton and spending over a decade at Mesirow Financial before joining KPMG in July 2022.
The conflict began on February 28, 2026, when Operation Epic Fury targeted Iran's senior leadership. The military action has had immediate and severe consequences for global trade, particularly through the Strait of Hormuz, a maritime chokepoint that normally handles approximately 20 million barrels of oil per day. This represents roughly one-fifth of world oil consumption and between 20 and 27 percent of all global seaborne oil trade.
Commercial traffic through the strait has plummeted more than 90 percent since the outbreak of hostilities. Iran has fired on multiple ships attempting passage and now selectively allows some vessels to transit, in some cases demanding payment of fees. The disruption has created severe supply constraints, with Middle East oil output falling by at least 9 million barrels per day in March compared to an estimated 26 million barrels per day in February.
Energy market volatility
Oil markets have experienced dramatic swings throughout the crisis. Brent crude prices initially surged to approximately $118 per barrel in late March before declining to around $70 by July. Prices then rebounded above $100 and reached $109 by early September, with some analysts warning that Brent could soar above $120 per barrel in 2027 if conditions continue to deteriorate.
The geographic distribution of impact has been uneven. China, which receives 37.7 percent of all oil exports passing through the Strait of Hormuz, faces the most severe exposure among individual nations. Asian countries collectively receive 89.2 percent of the strait's crude oil and condensate flows, making the region particularly vulnerable to the supply disruption.
Broader economic consequences
The crisis extends beyond energy markets. Between 20 and 30 percent of global fertilizer exports pass through the Strait of Hormuz, including urea produced from liquefied natural gas. Qatar has stopped production at its largest urea manufacturing plant, creating shortages that threaten agricultural output worldwide and raising concerns about food security.
International financial institutions have sharply revised their economic forecasts in response to the crisis. The World Bank projects that global growth in 2026 will slow to the lowest rate since the COVID-19 pandemic. Growth in developing economies is expected to drop to 3.6 percent in 2026, down from 4.4 percent in 2025.
Inflation projections have been revised upward across the board. The United Nations forecasts that inflation in developed economies will rise from 2.6 percent in 2025 to 2.9 percent in 2026. Developing economies face a sharper increase, with inflation projected to accelerate from 4.2 percent to 5.2 percent over the same period.
The disruptions are creating shortages of essential industrial inputs beyond fertilizers, including naphtha and helium, threatening output in plastics, packaging, and related manufacturing sectors. These cascading effects demonstrate how a regional conflict can rapidly transmit economic shocks across interconnected global supply chains.
As the conflict continues with no clear resolution in sight, economists and policymakers are grappling with the challenge of managing these unprecedented pressures while avoiding actions that could further destabilize the global economy.
