– Arshad Shaikh
The 12-day Israel-Iran conflict which broke out on June 13, 2025 sent shockwaves through the world economy and showed the vulnerability of our economic system during times of war. Fortunately, the conflict came to an end earlier than most analysts predicted. Still, it is critical to examine the conflict’s potential economic effects including inflation, rising defence expenditures, the loss of human capital and financial instability. Given the strategic significance of the Middle East region in international trade, any long drawn out war will have significant ramifications for Muslim nations around the world.
Economic Disruption and Decline
Wars devastate economies by destroying infrastructure, halting production, and disrupting trade. Both Israel and Iran suffered serious economic losses in the 12-day war. The conflict with Iran cost Israel an estimated $200 million per day or 5% of its 2025 GDP, adding to the strains already caused by the wars in Gaza and Lebanon.
Iran, whose economy depends heavily on the energy sector, was severely hit after decades of sanctions. Iranian oil exports were reduced from 11.7 million bpd to just 102,000 bpd as a result of Israeli strikes that targeted vital infrastructure such as the South Pars gas field and Kharg Island oil export facilities. With 22% to 27% of Iranians already living below the poverty line, the decline in oil revenue (it constitutes 50% of Iran’s budget) led to fiscal instability and made poverty worse.
Inflation and Supply Chain Shocks
As markets responded to concerns about supply shortages, the Israel-Iran conflict caused Brent crude oil prices to rise by 10-13% to $75-78 per barrel. With Iran’s naval capabilities the Strait of Hormuz which handles 20% of the world’s oil and 25% of its LNG was at increased risk of closing.
According to economic projections, a complete blockade might have caused oil prices to shoot up to $100 to $150 per barrel increasing global consumer prices by 0.4% for every 10% price increase. Supply chain disruptions made the problem worse. Iran-backed Houthi attacks in the Red Sea that forced ships to reroute around Africa, lengthening transit times and raising costs; shipping insurance rates increased by 30%.
Increased Defence Spending
Public finances are drained as a result of wars taking resources away from development expenditure towards defence and security. Large-scale reconstruction became necessary in Iran due to the destruction of military and nuclear facilities further taxing an economy already severely damaged by sanctions and inflation rates above 40%.
Regional powers like Saudi Arabia and the United Arab Emirates increased their defence budgets in response to the conflict’s escalation, diverting money from initiatives for economic diversification like Saudi Arabia’s Vision 2030. These programmes were employment-intensive and strategically designed, keeping in mind the high rates of youth unemployment.
Human Capital Loss and Migration
Wars erode human capital through loss of life, displacement, and emigration. In Iran, over 240 deaths, including military leaders and nuclear scientists, weakened institutional expertise, while Israel reported 24 fatalities, with reservists and evacuations disrupting labour markets. Iran’s economic crisis could trigger further emigration, exacerbating brain drain in a country where skilled professionals are already scarce. In Israel, expatriates are leaving, and border evacuations have displaced communities, straining social services.
Neighbouring Muslim-majority countries like Jordan and Lebanon faced risks of refugee inflows. For Muslim communities, the loss of human capital endangers long-term economic health. Skilled workers and youth migrate to safer regions, while their countries have to confront aging populations and weakened economies.
Strategic Role of the Strait of Hormuz
The 21-mile-wide Strait of Hormuz which separates Iran and Oman is the hub of the world’s energy trade handling $1.22 trillion in annual trade which includes 25% of the world’s LNG and 21 million barrels of oil per day. Iran threatened to close it during the conflict which would have disastrous effects. 20% of the world’s oil supplies could be cut off by a blockade driving up prices to $100 to $150 per barrel and causing a 1% to 5% increase in global inflation. Already up 30% shipping costs would increase dramatically upsetting food energy and product supply chains.
Especially in the Gulf countries with a majority of Muslims depend on the Strait for both imports and exports. 70% of the oil shipped by Saudi Arabia and the United Arab Emirates passes through it and nations like Qatar rely on it for LNG exports. Their economies would be severely damaged by a closure which would also limit government revenue and cause development projects to stall. Higher fuel and food prices would worsen poverty in Muslim countries that import energy such as Indonesia where 40% of the population is already at risk.
Because the Middle East imports 60% of its grain through the Strait, its disruption would also jeopardise food security and raise the possibility of humanitarian crises. If the war had gotten worse, the world economy might have seen a 0.5 to 1% decline in GDP and emerging markets like India, which depend on imported oil to the tune of 80%, would have experienced trade deficits. Alternative routes such as Saudi pipelines are unable to compensate for losses and stock markets could have dropped by 5-10%.
Armament Industry Wins, Rest Lose
The Israel-Iran conflict triggered a 2% drop in the U.S. S&P 500 and a 1.8% decline in Europe’s STOXX 600. Investors sought safe-haven assets like gold and the U.S. dollar. A prolonged conflict could have reduced global growth by 0.4% and raised inflation by 1.5%, risking stagflation. The IMF downgraded the Middle East’s 2025 growth forecast from 4% to 2.6%. Most impacted would be the Gulf economies facing potential losses of $730 billion to $1 trillion if foreign investment stalls.
According to the Stockholm International Peace Research Institute (SIPRI), “The Middle East accounted for more than a quarter (27%) of global arms imports in 2020-24. North Africa accounted for another 2.2%. GCC states accounted for 20% of global arms imports in 2020-24, with their import volume increasing by 4.1% compared with 2015-19.”
Former American President Dwight D. Eisenhower was spot on regarding the growing military-industrial complex when he said, “Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.”
