A “domino effect” on the global economy is feared as tensions between the US and Iran escalate, according to the International Monetary Fund chief, Kristalina Georgieva. She warned that US strikes on Iran could cause significant damage to global growth, with a rise in oil prices having widespread “secondary and tertiary impacts” that could lead to downward revisions in economic forecasts, especially for major economies.
The spark for this potential economic cascade is the Iranian parliament’s recent vote to consider closing the Strait of Hormuz, a critical maritime chokepoint through which a fifth of the world’s oil consumption flows. This retaliatory measure, in response to a US attack, threatens to create an unprecedented oil supply shock, pushing up inflation and impeding economic expansion worldwide.
Oil prices initially reacted with a jump of over 5% on Sunday, hitting a five-month high of $81.40. However, prices later retreated, with Brent crude falling nearly 1% to just over $76 a barrel on Monday. Despite this, the potential for dramatic increases remains, with Goldman Sachs estimating oil could hit $110 a barrel if Hormuz flows are substantially reduced for an extended period.
In diplomatic efforts, US Secretary of State Marco Rubio has called any closure of the strait “economic suicide” for Iran and has urged China to use its influence, given its heavy reliance on the waterway. Analysts at RBC Capital Markets are also advising caution, warning of “clear and present risk of energy attacks” from Iranian-backed militias and emphasizing that the situation remains fluid, as evidenced by two supertankers reportedly changing course in the strait.