This report is written from an economic perspective. From a human perspective, we acknowledge the loss of life across all countries involved and recognise the deep complexities of the political situation.
A new shock to the global outlook
From an economic standpoint, the global economy has been hit by a fresh wave of uncertainty following US- and Israeli-led strikes on Iran over the weekend. The key questions for markets are how long the conflict lasts and how far it spreads across the region, as these factors will ultimately determine the scale of the economic impact.
Iran has retaliated and has indicated it will target US assets in the region. This has widened both the scope and risk profile of the conflict, raising concerns about further escalation and spillovers into neighbouring countries.
The Gulf Cooperation Council (GCC) countries appear reluctant to be drawn into the conflict. However, their proximity, strategic importance and hosting of US military assets mean their involvement could be forced. There is speculation that escalation involving GCC countries could shorten the conflict, given the scale of global financial, energy and trade interests concentrated in centres such as the United Arab Emirates.
Political structure and regime dynamics
Iranian state media and international outlets have confirmed that Iran’s Supreme Leader, Ayatollah Ali Khamenei, has been killed. While this is an extraordinary development, it is important to note that toppling Iran’s leader is not the same as toppling the regime.
Iran’s political system is deeply institutionalized. Power is distributed across entrenched military, clerical and security structures. This makes Iran fundamentally different from past regime collapses in countries such as Iraq or Syria and increases uncertainty around how this conflict ultimately evolves.
Energy markets
Energy markets are the most immediate transmission channel. The Strait of Hormuz is a critical chokepoint for global energy supply, carrying roughly one‑fifth of the world’s oil and LNG flows. While the strait has not been formally closed, tanker traffic has ground to a halt as shipowners and traders suspend movements following Iranian attacks on oil tankers and warnings issued to vessels. Insurance premiums are also likely to rise, adding to freight costs and reinforcing upward pressure on energy prices.
Some large economies may be able to partially cushion the shock in the near term by drawing on strategic petroleum reserves. The United States and China both hold substantial strategic oil stockpiles that could be released to smooth short‑term supply disruptions. However, such measures are temporary and cannot fully offset a prolonged disruption to physical energy flows.
If disruptions persist, oil prices are likely to be propelled higher and remain at elevated levels. The Organisation of the Petroleum Exporting Countries, plus allied oil‑producing countries (OPEC+) met yesterday and agreed to raise production targets by 206,000 barrels per day from April 2026, but this increase is modest relative to global demand and unlikely to offset sustained supply disruptions.
The West Texas Intermediate futures oil price for the first generic contract jumped US$9.89, or 13.7%, in trade today, rising from a US$72.48 a barrel close on Friday night to a high of US$82.37. That’s the highest price since June 2023. Prices have since eased from this morning’s peak, but volatility is likely to remain elevated and prices highly sensitive to developments in the Middle East.
During the 12‑day Israel–Iran conflict last year, global oil prices rose 19.1%, climbing from a low of US$68.36 a barrel on 12 June 2025 to a high of US$81.40 on 23 June 2025. Once the conflict ended, oil prices subsequently fell below the levels prevailing at the start of the conflict.
In the near term, our expectation is that oil prices could rise above US$100 a barrel in the near term should the conflict persist, deepen and widen.
Supply-chain implications beyond energy
While energy markets are the most immediate transmission channel, fertiliser represents an important secondary risk to global supply chains. A significant share of global fertiliser trade, particularly nitrogen‑based products such as urea and ammonia, transits the Strait of Hormuz. Prolonged disruption would raise agricultural input costs globally with limited scope for substitution or drawdown from inventories.
The economic effects would emerge with a lag through higher food prices and tighter margins for farmers, reinforcing inflation pressures and adding to downside risks for growth. More broadly, disruption to fertiliser flows would amplify existing supply‑chain fragilities, extending the impact of the conflict beyond energy into food production, transport and downstream processing.
Sectoral and consumer impacts
Higher energy prices will affect industries and businesses differently. Energy producers and defence‑related companies are likely to benefit, while energy‑intensive industries such as steel, aluminium and chemicals, as well as transport and logistics sectors including airlines and shipping, will face higher costs.
Aviation is already experiencing severe disruption. Dubai, the world’s busiest international airport, has suspended operations and many Middle Eastern airlines have grounded flights as airspace remains restricted. This represents the largest shock to global air travel since the pandemic and is likely to weigh on international tourism. However, it may provide some support to domestic tourism, as Australians opt to take their holidays at home.
Higher fuel prices will flow through to households if this conflict persists and extends, reducing discretionary spending and increasing downside risks to consumption‑led growth.
Financial markets and investment implications
Financial markets are likely to remain volatile, with a risk‑off tone favouring safe‑haven assets such as gold and the Swiss franc. Gold, in particular, typically benefits during periods of heightened geopolitical uncertainty and elevated market volatility. The spot price of gold is already up 2.2% near US$5,400 per troy ounce from the close on 27 February. The Australian dollar typically underperforms during periods of heightened risk aversion. In early trade today, it lost almost one US cent, but has since almost fully recovered this loss. Australia’s status as a net energy exporter, together with the Reserve Bank of Australia’s rate increase last month, may provide some support to the local currency. Government bonds are also likely to receive support in this environment, placing downward pressure on yields.
Importantly, equity markets entered this geopolitical shock already facing elevated anxiety. In particular, investors have been questioning whether the scale of artificial‑intelligence‑related capital spending is being matched by sustainable returns. These concerns had already contributed to volatility in global equity markets prior to the latest escalation.
The addition of geopolitical risk places further pressure on equities, particularly higher‑valuation segments of the market. In Australia, energy and materials have been among the strongest‑performing sectors over the past year and this relative strength may persist in the near term.
Implications for policy and portfolios
The RBA’s near-term policy outlook may be complicated by the geopolitical shock. Higher energy prices and renewed supply‑chain disruptions, if sustained, will add to headline inflation pressures and increase the risk that inflation remains elevated for longer, especially if inflation expectations also rise.
However, the implications for policy are not one dimensional or that simple. Rising fuel costs and heightened uncertainty are also likely to weigh on household spending, increasing the risk that consumption growth slows as the shock feeds through to real incomes. In addition, the RBA has placed growing emphasis on broader financial conditions rather than the cash rate alone. Earlier support from a stronger Australian dollar, low market volatility and easier funding conditions may now unwind as global risk aversion rises. Higher risk premia, wider credit spreads and more volatile exchange rates could tighten financial conditions, dampening activity even in the absence of further policy tightening.
Overall, the current environment reinforces the importance of diversification across asset classes and geographies. Periods of volatility may also create opportunities for long‑term investors to selectively add high‑quality assets at more attractive valuations.
