BLOG — June 24, 2025

Picture This: Israel-Iran Conflict Leads to Sharp Shock in Global Growth

MENA conflict impact scenario

With a fragile ceasefire and deep uncertainty around any resumption in nuclear negotiations, the Middle East remains at severe risk of interstate war between Israel-Iran, with scope for escalation to a multifront conflict. 

We ran a scenario to illustrate the potential impacts of an extreme escalation toward a regional conflict in the Middle East. This scenario is based on assumptions and should be viewed as a possible outcome rather than a prediction.

In this scenario, we have assumed that:

  • The ongoing conflict between Israel and Iran escalates into a multifront regional war that includes the US.
  • There would be punitive strikes targeting critical infrastructure causing heavy disruption at select regional ports and of key maritime routes like the Strait of Hormuz and the Red Sea for at least 2 quarters.
  • Global oil price would rise by as much as 30% based on deviations from historical trend.
  • Cost and availability of oil and gas would be impacted, particularly hitting Asian and European economies dependent on oil from the Gulf.

Running this scenario indicated these possible outcomes:

  • Real GDP would fall by 1.7% in Q3, followed by a swift recovery as energy markets stabilize and inflation decreases.
  • The persistent effects on investment and trade would take the remainder of 2025 to return to previously anticipated levels.
  • APAC will also be strongly impacted (lower growth, higher inflation) as they highly depend on oil and gas imports from MENA region.
  • Potential reduction of industrial production and investment would lead to less employment and consumer spending over medium-term.

Why this matters

The risk of miscalculation or unintended escalation among all key stakeholders remains high, with the potential for a broader regional war that could destabilize the Middle East and disrupt the global economy. 

Our proprietary Global Link Model suggests that a regional war in the Middle East would cause the global economy to shrink by 1.7% in Q3, the first contraction since Q2 2020 (down 1.2%) during the pandemic.

The projected growth rates in most major economies remain well below where they were prior to the November 2024 US elections, reflecting the unfolding impact of ongoing trade tensions and related uncertainties. 


This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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