Trump's Iran war has triggered a global economic and financial crisis

The rise in the US inflation rate in March may be only a preview of what lies ahead-not just for the US-if the US war on Iran remains unresolved. Iran has effectively blockaded one of the most critical chokepoints in global energy trade. The Strait of Hormuz is a vital artery for a large share of the world's oil exports. Even before the latest escalation, prices were climbing amid the regional conflict. Now the risk of Iranian drones striking tankers has pushed markets into deeper uncertainty.

With 90 per cent of the oil passing through the Strait of Hormuz and 83 per cent of liquefied natural gas bound for Asia, the region is at the centre of a deepening economic and financial crisis triggered by the US war on Iran. The economies of South, Southeast, and East Asia face a double shock: higher oil prices in US dollars, compounded by further increases as their currencies weaken against the dollar.

Iran's closure of the Strait of Hormuz after the February US-Israeli attack on Iran has triggered a global supply shock. Some analysts warn that oil prices could nearly double if the disruption persists-an outcome that would likely to push the world into recession. 

Despite recent efforts to reduce dependence, the global economy remains tightly interconnected. When shipping in the Persian Gulf is threatened, the impact is felt everywhere. The war has already prompted the International Monetary Fund (IMF) to downgrade its global growth forecast.

New IMF analysis projects growth to slow to 4.3 per cent this year, 0.3 percentage points below pre-war forecasts, and project inflation to rise. That may sound benign by global standards, but for a region where rapid growth is imperative to create millions of new jobs for the rapidly expanding population, any hit to growth is a problem.

Consumers cannot afford higher energy prices, and governments cannot afford to provide aid to offset the costs. And as financing tightens, the cost of desperately needed borrowing for these countries increases. The IMF has warned that the Iran war could raise global debt, forcing governments to choose between easing the cost-of-living shock and protecting public finances.

Unsurprisingly, attention has focused on how a closure of the Strait of Hormuz could drive up crude oil prices. For the rest of the world, the most immediate effect is straightforward: disruption to oil shipments through the Strait. Yet the most significant consequences extend well beyond crude. Higher energy prices and interest rates, as well as rising geopolitical tensions are not only putting pressure on inflation but growth and public finances of developing countries.

Jean-Marie Paugam from the World Trade Organisation (WTO) said that the fertiliser shock is a greater immediate threat than the oil and gas shock. A third of global urea exports and a half of sulphur exports come from Qatar and the Gulf. Disruption of fertiliser flows through the Strait of Hormuz could slash harvests. Disruptions to fertiliser supplies caused by the US war on Iran risk triggering a multi-year food crisis globally.

There is an interaction between the oil price hikes and the hit to stock markets which manifests in currency values. One of the worst affected stock markets is that of Korea. The currency turmoil now also extended to Japan triggering the possibility of a major intervention in the market to halt the slide of the yen.

Also, the other main financial effect of the continuing US war against Iran is the fall in government bond prices and the consequent rise in interest rates or yield as investors consider the increasing possibility of stagflation. According to Bloomberg, $2.5 trillions have been wiped out from the value of global bonds in March.

The Financial Times reported that "foreign central banks have slashed their holdings of Treasuries at the New York Federal Reserve to their lowest level since 2012, as countries sell US government bonds to prop up their economies and currencies in the wake of the Iran war". It is estimated that the value of Treasuries held by official institutions, mostly central banks, had dropped by $82 billion since February 2025.

Middle Eastern economies are losing enormous amounts of oil revenue-more than $500 million a day-due to reduced sales and production. Because oil-derived products are so deeply embedded in modern economies, the war will disrupt global supply chains and raise costs, with some effects likely to persist even after the conflict ends and shipping through the Strait returns to normal.

The situation is even more precarious for the Gulf monarchies that emerged out of the Sykes-Picot Agreement of 1916 (a secret treaty between Britain and France, with Russian assent, that divided the Ottoman Empire's Arab provinces into zones of influence). Percy Cox, a British colonial administrator in the Middle East, is considered the main architect of the region's modern borders. Cox used a red pencil to draw lines on a map in the early 1920s, defining boundaries that still cause controversy today.

The UAE, one of the world's wealthiest countries, has asked the US for financial support after missiles damaged its gas fields and shipping through the Strait of Hormuz was halted. It has also announced it will leave the Organisation of Petroleum Exporting Countries (OPEC), a move that would let it set its own oil output instead of following the group's production quotas. Analysts view the decision as a major blow to OPEC's ability to influence global oil prices, and it could add downward pressure on oil prices.

Donald Trump welcomed the UAE's decision to leave OPEC, calling it "great" and "a good thing" for the United States. He said the move would help lower global oil and gas prices and praised UAE leader Mohamed bin Zayed as "very smart." The United States has long opposed OPEC, which emerged from Third World nationalist movements in the 1960s that sought greater control over resources for the Global South. Instead, Washington has favoured a system dominated by major US oil companies.

Except for Oman, the Gulf monarchies and the Jordanian monarchy have sided with the US and Israel in their war against Iran, effectively acting as US proxies. The UAE has criticised other Gulf states for not taking a stronger anti-Iran position in support of US-Israeli aggression. Working with Israel, it is seeking to reshape the regional balance of power, and many political observers view the UAE as Israel's Trojan horse in the region.

Gulf monarchies lie in the heart of the conflict zone and host numerous US military installations established after the Operation Desert Storm in 1991. Once framed as a shield against regional threats, the bases have also become targets.

But the longer-term consequences may prove more significant. A system based on patronage works only if the patron accepts certain responsibilities. Protection must bring tangible benefits to those under its umbrella. If the relationship begins to serve only the interests of the patron, dissatisfaction inevitably grows. In the language of the criminal underworld, protection works only when the protector keeps their part of the deal. If not, those being protected will eventually begin searching for alternatives.

This leads to a rarely acknowledged truth: genuine alliances exist only between relatively equal powers. When one participant is vastly stronger than the others, the relationship is no longer an alliance in the classical sense. It becomes a patron-client relationship.

Until recently the Western alliance appeared to be an exception. Its cohesion seemed unusually strong. Even when the US placed its partners at a disadvantage, economically or politically, those allies rarely pushed back openly. They grumbled, but they remained loyal.

The reason was simple. Over the past decades Western Europe's ability to guarantee its own security has steadily declined. As a result, its states have grown increasingly dependent on American power. The price of autonomy has become too high.

The current Middle East crisis may mark a turning point. For many Europeans, the aggressive and legally questionable nature of US actions in the region is becoming deeply uncomfortable. While they are accustomed to a certain degree of hypocrisy in international politics, what unsettles them now is the increasingly open disregard for established norms.

Bangladesh condemned Iran's counterstrikes for breaching the sovereignty of Gulf monarchies, but it did not criticise the US and Israel for violating Iran's sovereignty. By omitting any recognition of Iran as the primary victim, the statement highlighted not only Bangladesh's well-known economic vulnerability but also a deeper structural weakness in its foreign policy. The war did not create this weakness; it simply exposed it.

Bangladesh-Iran relations are under strain as regional instability escalates. The US war on Iran has disrupted energy shipments and increased risks to navigation through the Strait of Hormuz. Despite longstanding cultural ties and Tehran's signals of preferential treatment for friendly states, Bangladesh has struggled to secure safe passage for its ships and reliable energy supplies. Dhaka is now bracing for possible fuel shortages and trying to limit the economic fallout through diplomacy.

Bangladesh imports 95 per cent of its oil and 30 per cent of its gas, and 70-90 per cent of these supplies normally transit the Strait of Hormuz, which is now closed. The Iran war is pushing up price of energy and food, fuelling higher borrowing costs and hitting growth. With no clear end to the Iran war in sight, Bangladesh has begun rationing fuel. Higher petrol and diesel prices have raised transport costs and are pushing up the prices of essential everyday goods.

Soaring fuel prices are delivering an "income shock", undermining consumer confidence as households come under severe financial strain. The US war on Iran has cut off about 20 per cent of the world's oil supply, while also disrupting natural gas and fertiliser production, pushing inflation higher. Inflation is not just about rising prices; it is also about how income is redistributed. In Bangladesh, where wages are stagnant, even declining in real terms with low productivity compared to regional competitors, price increases tend to raise the profit share rather than workers' incomes.

Like many countries, Bangladesh's main concern now is an inflation spiral that could deepen the cost-of-living crisis. If inflation expectations become de-anchored, businesses will pass rising costs on to consumers, pushing prices higher still. That dynamic raises the risk of stagflation-persistently high inflation alongside an economic downturn-especially if the central bank responds with sharp interest-rate increases to bring inflation under control.

An IMF blog post published in late March noted that although the war may affect different parts of the global economy in different ways, it ultimately points to higher prices and weaker growth. Such a situation has decisive economic implications for oil importing countries like Bangladesh facing higher inflation and tighter policy trade-offs. It demonstrates that no country is immune from the global economic crisis triggered by the US war on Iran.

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