The economic instability in the Middle East is worsening with the escalation of the conflict between Israel and Iran, which began last week, raising concerns that a prolonged crisis will affect the global economy.
Heightened tensions in the region have triggered fluctuations in energy markets and disrupted supply chains.
Experts say that uncertainty in the energy sector is driving up global oil and natural gas prices, while disruptions to the region's logistics infrastructure amid the conflict are affecting imports and exports, particularly food and industrial goods.
Economies dependent on these supply chains and countries with trade relations with the two countries are primarily affected.
Rising geopolitical risks in the Middle East are shaking investor confidence, which is evident from the sharp declines in stocks across many countries, especially in the Gulf states. Credit ratings in these countries may also face pressure due to the rising risk premium.
Ali Arı, an economics professor at Istanbul-based Marmara University, told Anadolu Agency (AA) that the potential closure of the Strait of Hormuz is one of the epicenters of the ongoing crisis, as the waterway accounts for one-third of global oil and one-fifth of liquefied natural gas (LNG) trade.
"Even the slightest disruption in the Strait of Hormuz will be enough to cause panic across the markets-even the potential of its closure caused oil prices to jump from $65 to $78 (per barrel)," he said, noting that alternative routes are insufficient, pointing to the waterway’s significance, as 20 million barrels of oil and 90 billion cubic meters of LNG pass through the narrow route every day.
Arı said the deepening crisis can push up global inflation, while fueling global uncertainties can lead to downward revisions in growth rates in the global economy.
He mentioned that the risk perception alone can add enough strain to the markets to keep prices high if the escalation of the conflict does not disrupt oil and gas supplies.
"Producers may benefit from higher prices in the short term, but the declining demand and accelerated efforts to seek alternative energy sources can prevail in the long term," he said.
"Consumer countries are seeing inflationary pressures rise on energy costs, which may force central banks to reconsider their monetary policy," he added, noting that the Iran-Israel conflict's impact goes beyond a regional issue.
Arı highlighted that the escalation of political tensions in the Middle East affected the risk appetite, giving rise to uncertainties and prompting investors to move away from the region and opt for safe-haven assets.
"U.S. and European stock markets saw major sell-off waves when the tensions intensified, as the S&P 500 and the Nasdaq fell around 0.8%-0.9% with concerns that the Trump administration may take harsher steps against Iran, while safe-haven assets like gold rose," he said.
Arı also noted that the economic impact on the region is varied, with Gulf countries enjoying some short-term financial opportunity due to higher oil prices caused by geopolitical risks, while the unexpected capital flow may aid in the closure of budget deficits and the strengthening of wealth funds.
"But there’s another aspect to this: If this uncertainty persists, or in other words, if the conflict isn’t brought under control in the short term, foreign investments into the Gulf could be disrupted-global funds are already cautious and the continuation of the conflict can prompt them to postpone their projects or shift their attention elsewhere," he said.
"In the event of an even broader conflict, capital outflows may accelerate, sharp declines across the stock markets can be expected and we may even see liquidity stresses in the banking system," he added.
"Rising tensions can also push for more defense spending, adding extra burdens on countries."
