Quantifying the economic impact of the Middle East conflict by region

We explore the impact of the Middle East conflict across the global economy, both in our central scenario of a limited duration conflict and our risk scenario of longer lasting disruption with a more pronounced oil price impact.

The effects of the Middle East war are rippling through economies and markets. Our central scenario remains that the conflict will be of limited duration, with a relatively contained and temporary rise in the oil price. We expect an increase of USD 10 per barrel, reverting to the prior USD 60-70/barrel range within six months. This scenario should not be enough to derail global economic expansion, and we have made only small adjustments to our existing growth, inflation and monetary policy forecasts.

We have made only small adjustments to our existing growth and inflation forecasts

Exposure to rising oil and gas prices varies at regional and country level. The US and many Latin American economies are more insulated as net energy exporters; Europe and Asia are net importers. Many eurozone economies are highly dependent on imported energy, and confidence and risk aversion tend to have significant effects on economic and financial conditions. Fuel balances are particularly negative for Asia’s major developed and emerging economies, although China has options, including the capacity to increase coal and renewable energy production. Many emerging markets have more substitution opportunities than those in Europe, yet they hold lower oil reserves; from 30-50 days’ worth in some emerging markets to around 90 days in Europe and 100 days in China.

We have modelled two scenarios, and their economic impact¹. In our central scenario of a contained oil price rise, we would expect only a negligible increase in US headline inflation and unemployment and a slight slowdown in growth. We have raised our average US inflation forecast by 0.1 percentage points to 2.6% and our expectation of three interest rate cuts by the Federal Reserve (Fed) this year remains intact. We would also expect a limited impact in Europe, with headline inflation increasing to just 2.0%, a level at which the European Central Bank would still keep rates on hold. Across developed Asia and emerging markets, we would expect just a 20 basis point increase in headline inflation and 20 basis point decrease in growth, although with significant country-by-country divergence. Current oil prices also appear to reflect expectations of a multi-week rather than a multi-month disruption to oil markets.

China has options, including the capacity to increase coal and renewable energy production

Quantifying a risk scenario

Our risk scenario models a more protracted conflict, with an increase in the oil price of up to USD 50/barrel, to peak at around USD 120/barrel. This is in line with the oil price shock when Russia invaded Ukraine four years ago. Such a spike would exert a ‘stagflationary’ effect, raising inflation and cutting global growth. In this scenario we forecast 2026 US real GDP growth of 1.2%, with headline inflation over a percentage point above target.

We would expect the Fed to ‘look through’ this increase as temporary, and to keep its policy rate on hold. A more pronounced increase in unemployment to 5.5% - above the level we would expect – could on the other hand see the Fed switch into a rate-cutting cycle.

In the euro area, imported energy dependence would pose meaningful risks to growth in our risk scenario, and we would expect inflation to rise to around 2.8%. A weaker euro would exacerbate the inflation shock, although moderate the negative growth impact. Higher inflation would create challenges for the European Central Bank, raising the risk of a policy mistake if it were to increase interest rates into a slowdown.

In the euro area, imported energy dependence would pose meaningful risks to growth in our risk scenario, and we would expect inflation to rise to around 2.8%

Even in a risk scenario, Switzerland’s lower dependence on imported gas, its current low inflation, and the tendency of the Swiss franc to strengthen in testing times would limit risks to the economy. We think policy rates would remain on hold. The bar to either raising rates to counter inflation – which would remain below-target even in our risk scenario – or cutting them into negative territory to support growth, would be high. 

related content.

investment insights

Better-than-expected growth points to a stable US, European outlook

February 5, 2026

private banking.

learn more

Our risk scenario would have material negative consequences for Japan and emerging markets, particularly those in East Asia, India, Thailand, and Central and Eastern Europe. Australia, Brazil, and South Africa would be exceptions. The scope for monetary easing in Indonesia, the Philippines, Poland, Turkey and Mexico would narrow. Gulf economies’ look vulnerable in a scenario where oil and gas exports were constrained for a prolonged period.

Our risk scenario would have material negative consequences for Japan and emerging markets

China would likely fare better than its neighbouring economies in our risk scenario. It has been building oil stockpiles, and has the capacity to increase alternative energy sources in the form of both coal and renewables. It could potentially access more Russian oil and there are indications that Iran may be prepared to allow transit of the Strait of Hormuz by Chinese-owned vessels. Chinese authorities also have the scope to increase policy support. However, in the case of prolonged disruption in the Strait and a risk scenario in which oil prices rise USD 50 per barrel, we would expect downward revisions to growth. At the time of writing, Brent crude oil is around USD 90/barrel.

Overall, while the situation in the Middle East demands close attention, we continue to expect a limited duration conflict, with a contained and short-lived impact on energy prices. As such, we retain a moderate pro-risk bias in portfolios, yet stay alert to developments and ready to shift our stance as needed.