If at the start of 2025 and now in 2026, we thought that Trump’s tariffs would adversely impact the US economy and the rest of the world, we now also have the impact of Trump’s war in Iran to contend with. The latter could, in fact, take a much bigger toll on the global economy than tariffs because it is an energy shock at the core, and one affecting the entire world. And now, with the Strait of Hormuz blockaded by the US, through which 20% of the world’s oil passes, we don’t know if even the ships that were being allowed to go through by Iran for 45 days of the war will still have right of way or not.
East and west, all of Asia is worst affected
Because so much of the war centres around the Strait of Hormuz, which Iran is using to leverage its position, the biggest impact on the world economy is through an energy shock. Global oil supplies are estimated to have fallen by 8 mb/d in March 2026 according to IEA (International Energy Agency). Many countries are having to rely on their reserves, on diversifying sources of supply, on rationing petroleum and diesel products and on raising prices in their domestic economies, or some combination of all these measures.
Although the war and the crisis is in West Asia, it is all of Asia – especially South Asia and eastward – that is suffering the most as this entire region relies more on oil and gas supplies coming through the Strait of Hormuz. China and India are the two largest importers of crude oil in Asia and China alone imports over 80% of Iranian oil exports. The rest of South-east Asia as well as East Asia, including Japan also rely heavily on oil shipments from the Middle-east, especially from the Strait of Hormuz. China would have imported more from Russia, as has India, since US sanctions on Russian oil exports were lifted for 30 days. Now that the War is almost 60 days old, one doesn’t know how long sanctions on oil can and should stay in place!
Asia is facing the brunt on account of soaring oil prices and the lack of adequate supply. China has apparently built up huge strategic reserves of crude oil which they can tap into should the need arise, but India doesn’t have the same luxury. The India government has refrained from raising petrol and diesel prices but this is only because of local state elections underway and we can be sure that by the end of this month prices will be raised. As indeed they should, because there is no way that the Indian government can afford to take on greater subsidy burdens at a time when fertilizer subsidies will also have to be significantly increased thanks to the Iran war. There will be some demand destruction and slower growth as a result, but this is the price the Indian economy will have to pay to avoid the bigger risk of soaring and stubborn inflation in the months ahead and possibly stagflation as well.
All reports from the region suggest that even if Trump comes to some kind of agreement with the Iranians, it will still not save most Asian economies from the damage already being inflicted. The SCMP writes that Asian economies are most in danger and that the worst is yet to come. The effects are through the energy shock, causing high inflation, supply disruptions to growth and also many Asian currencies sliding against the US dollar, as oil surges and money returns to safe havens, even to the warring party, the US, rather paradoxically, as Reuters reports. Reuters also cites IIF data to report that emerging Asian economies have seen the biggest outflows since 2020. The ADB offers similar prognosis of how Asian economies will suffer against the massive supply disruptions and soaring inflation. Slowing trade on account of weakening demand as well as higher shipping costs will also adversely impact these Asian economies.
What is most unfortunate is that the world’s growth engine for the past decade or so – all of south-east and east Asia – will face the brunt of the Iran war. How this will affect supply chains of chips, consumer electronics, automobiles, EVs and other hi-tech goods is yet to be seen but we can expect it to be quite adverse, considering that even helium which is used in chip manufacture is shipped through the Strait of Hormuz.
We must also spare a thought for the Gulf nations that have been drawn into the US-Israel war with Iran. So much of their oil and gas and energy infrastructure has been badly damaged in the missile and drone strikes, as have their desalination plants and other civic infrastructure that it is going to take months for them to recover from this setback. This is also why oil and gas prices will not return to pre-war levels anytime soon, even if the conflict ends today. Rebuilding and repairing their infrastructure as well as restoring supply to the world will take many months, maybe even more than a year.
Impact on Africa and Latin America
After Asia, the region likely to be most affected by the Iran war is Africa. Though many African countries are oil-producing nations, most of them lack refining capabilities. This is most unfortunate, and it is time these countries explore greater investments in refining soon, as they will otherwise lose out on the opportunities that oil-refining brings for economic growth, including through byproducts that are then intermediate goods in several other industries. Besides the price these countries pay for imported petroleum and diesel taking a toll on their economies, many African nations will suffer from supply disruptions of everything from food and fertilisers as well as higher inflation. I suspect one of the main reasons for foreign oil companies not investing in developing refineries in African countries is the lack of security, political stability, law and order, as well as ethnic conflicts, not to mention terrorism.
The bright spot for Africa, though, is renewable energy especially solar and hydro power. Apparently, there is greater investment taking place in these cleaner energy options which would also bring down costs as they get scaled up, and would help the vast continent make the necessary clean energy transition as well according to the IEA.
On the other hand, Latin America isn’t as dependent on Middle-East oil through the Strait of Hormuz as the IEA reports. Latin American countries depend on their own crude oil production, mainly from Venezuela and other countries. Besides, Latin American countries have huge capacity in renewables, from solar and hydro to wind and geo-thermal. Renewables generate as much as 60% of their electricity. In addition, Latin America has also shifted to ethanol as fuel over the past many decades and with all this together, the continent’s exposure to an energy crisis from the Iran war is limited.
That said, higher prices of fuel and of energy, can always feed through to other products and Latin America is a large importer of many goods which means they could end up with imported inflation. In fact, the real and immediate danger from this Iran war and the energy shock is higher consumer price inflation as well as higher producer prices.
The effect of higher inflation and lower growth
The effect of the Iran War on countries in Europe, UK and US is not so much because of supply shortages, but of higher prices. US is a large exporter of oil and gas now, especially to Europe since the Ukraine-Russia conflict, but the country is being impacted by the Iran war most at the gasoline pump, with gasoline prices up by as much as 21% since February 28, 2026. The March 2026 CPI reading for the US came in at 3.3%, and most of the increase was accounted for by fuel and energy prices – rising by as much as 21%. However, this doesn’t mean that the tariff effect isn’t there; if one looks at the more detailed list by expenditure category, prices of goods such as apparel, footwear, home furnishings, electronics equipment and computers as well as software were all significantly higher and I think these are the effects of Trump’s tariffs. It is just that in comparison to the spike in energy prices, these don’t seem as significant. That said, they would reflect in core CPI and in core personal consumption expenditures. What’s more, the US government has just announced that importing companies in the US can now start applying for refunds against the IEEPA tariffs that the US Supreme Court struck down earlier this year because it was unconstitutional.
In fact, the US economy – which looked the strongest among western economies at the start of 2026 – now looks the most vulnerable to me. The American consumer is said to be resilient, but this is only at the higher end of the income classes, and it’s also due to income tax refunds that almost all households in America have been receiving this year. This makes it already tough to fight inflation, with higher consumption and higher prices from tariffs at the same time. The latest reading of q4 2025 US GDP in the US was further lowered to 0.5% and if you look at the contributions to growth by industry, it appears that the only industries growing are wholesale and retail trade, educational services, healthcare and social assistance and information. Manufacturing, which is what Trump wanted more of back in the US, contracted in Q4 2025 and is slowing down. What’s more, growing business investments – especially those in technology and AI – that contributed the most to US’ GDP growth in 2025 are reported to be slowing down now. This is because of doubts and uncertainty over the effects of AI on productivity and revenue growth, as well as profitability and one can see some of this cooling off in the stock markets as well. On top of all this, there is growing concern over private credit markets in the US where some large companies are having trouble with honouring redemptions. And, from listening to the business news on CNBC and Bloomberg here in India, I see that there is also concern about many AI investments being tied to private credit, casting a shadow on big tech and one part of the financial services industry in America. Hopefully this is not the start of the AI asset bubble going bust.
US has mid-term elections later this year and it’s the reason Trump is keen to wind down the Iran war because higher fuel prices and general inflation will certainly impact the electorate. As it is, most Americans are against this war in Iran and are more concerned with growing their own economy and with other matters such as immigration and the political and social divides within their country.
Europe and UK are adversely affected by this energy crisis arising out of the Iran war mostly through higher prices. Those countries with not enough energy in storage, such as the UK, are more impacted than others and some governments seem to be announcing energy subsidies to cushion households against soaring energy costs, but I think they might have to wind these down quickly as most of these countries do not have the fiscal room to increase government spending and have huge debts already. Fortunately, they are in spring going into summer and energy costs ought to be lower than in winter months.
In fact, IMF and World Bank at their Annual Spring Meetings in the US this month have warned that the Middle east crisis will have an adverse effect on global economic growth. The IMF World Economic April 2026 Outlook has revised global GDP growth downwards to 3.1% for 2026 with estimates that emerging and developing economies will see the most slowdown in growth as they are commodity importers. This is, of course, assuming that the conflict is a limited one. In addition, they warn that other factors such as further geopolitical fragmentation, disappointment over gains from AI as well as increased trade tensions could further worsen the prospects of economic growth. I think that central bankers around the world will have to be watchful regarding rising consumer price inflation and slowing growth as a result of the Iran war. They will have to be ready to fight inflation with their toolkits as governments prioritise their spending with an eye on fiscal deficits and debt. The IMF cautions that although increased defence spending can have a positive short-term effect on economic growth, it can fuel inflation and create medium-term challenges on the fiscal and debt positions of countries. Besides, there is the balance between increased defence spending and social spending to consider at a time of an economic crisis, and governments will have to be careful about public sentiment that could quickly spiral into social unrest.
The US-China dynamic
China has largely kept out of this Iran war even though it is rumoured to be helping Iran with missile defence shields and other technology. Trump immediately announced a 50% tariff on China if it was indeed helping Iran in the war. This, even as the two leaders of US and China were due to meet this month, now postponed to next month.
The Trump-Xi Summit aside, we need to also consider how the world’s largest economies of US and China will grow this year, and in the future, as several other economies depend on this. The US and Chinese economies are still inextricably linked even though there has been talk of decoupling for decades. It is true that goods trade between the two countries has reduced to US$ 414.68 billion in 2025 from US $ 581.96 billion in 2024 as a result of Trump’s tariffs, but China is still depending on exports for its growth. In the meantime, China has increased its exports to ASEAN countries, to Africa and to the EU in 2025. And while the world talked of a China+1 strategy during Trump’s first term in office, it is China that has done a China+2 on the US and the rest of the world; Chinese manufacturers opened production facilities in Mexico and Vietnam besides rerouting intermediate goods through these countries!
China has yet to tackle the difficult subject of raising domestic consumption demand, opting to boost exports to other countries instead. The country’s Q1 2026 GDP growth reading came in at a better than expected 5%, led by exports, of course. The longer China puts off structural reforms aimed at growing domestic consumption, the more difficult will the reforms be, and the less effective, thanks to the country’s rapidly ageing population. All those robots China is reportedly building might help maintain or improve productivity of its factories, but consumers will still be human and China needs consumption of all kinds – goods and services – to grow.
We don’t know how this war and the year will end. But I think that both the tariffs and the war will shift the centre of economic gravity towards large emerging and developing economies, including China, India, Brazil and Russia. Trump hates BRICS but there is no doubt that his Iran war has benefitted Russia the most economically. One hopes that these economies and others like Turkey, Mexico and Indonesia can all keep economic growth going in 2026, albeit at moderate levels.
Now that the global economy is facing the double whammy of higher tariffs and an energy shock, it is perhaps time for globalized businesses to turn to long-term investments overseas rather than rely only on trade, as I have written recently on my blog. Think of what Japan did in the US, after the oil-shock of the 1970s.
Peripatetic Perch 