How Much Impact Will Global Economy Face If Strait of Hormuz Is Blocked Long-Term?

TradingKey - Over the past year, even as the Trump administration frequently provoked trade frictions, eroded trust in international institutions, and created diplomatic uncertainty, the global economy has shown greater-than-expected resilience. The market seems to be signaling that geopolitics and economic growth can 'go their separate ways'.

However, when military actions by the U.S. and Israel against Iran escalated into a regional conflict, everything changed fundamentally. The real transmission channel of this conflict to the global economy is not the smoke of the battlefield, but the volatility of the energy market. The Strait of Hormuz, the narrow waterway along Iran's southern coast that carries about one-fifth of the world's oil, is one of the few critical nodes in the modern economic system that cannot be easily replaced.

Following the attacks by U.S. and Israeli forces on Iran, Tehran launched multiple rounds of retaliation, causing turmoil in global energy markets. Economists warn that a prolonged regional conflict could trigger a new inflationary spiral related to oil.

Beyond geopolitical implications, the attacks could also throw global trade and the economy into disarray. As seen after Russia's invasion of Ukraine in early 2022, disruptions in oil and gas supplies ripple across the economy, driving up gas prices, corporate operating costs, and household expenses.

Allianz Global Investors pointed out that this spike in oil prices and the associated 'energy-driven inflation shock' could 'complicate the monetary policy outlook,' as a 5% to 10% rise in oil prices 'typically raises headline inflation in the U.S. and Europe by 0.1 to 0.3 percentage points immediately'.

Meanwhile, analysts at Ebury warned that a sharp and sustained rise in global oil prices would have broad consequences for the global economy, as it could push up inflation expectations.

Global Economic Test Under Extreme Conditions

Economists generally agree that the core of the recessionary and inflationary shocks triggered by this conflict depends on its duration.

Late on the night of March 2, local time, an advisor to the commander of Iran's Islamic Revolutionary Guard Corps stated that the Strait of Hormuz has been fully blockaded, and any ship attempting to force passage will be targeted. As a mandatory route for nearly 20% of global oil shipments, a long-term disruption of this waterway would cause a chain reaction in energy supply chains that would quickly sweep the world.

Analysts stated that if the strait is completely blocked for more than 30 days, international oil prices would jump to $120-$150 per barrel; if the blockade is further extended, oil prices could even exceed $200, potentially hitting the $250 mark.

In the energy transportation landscape of the Strait of Hormuz, Asian markets face higher risk exposure. In 2024, approximately 84% of the crude oil and condensate shipped through the strait went to Asia, and the share of liquefied natural gas (LNG) also exceeded 80%.

Economies like China, India, Japan, and South Korea are heavily dependent on energy supplies from the Gulf. If the strait's shipping lanes are blocked, soaring energy import costs will directly squeeze manufacturing profit margins while weakening consumer spending power.

Europe will not be immune, especially given its higher sensitivity to LNG price fluctuations. Although Eurozone inflation is currently relatively low, if an energy shock is superimposed on already weak economic growth momentum, the room for Eurozone monetary policy adjustment will be rapidly narrowed.

While the U.S. is better positioned than many of its allies to withstand energy shocks due to its own oil and gas production, the spillover effects of the conflict on global trade, prices, and investment could still backfire on the U.S., undermining the previously favorable economic growth outlook for 2026.

In an extreme scenario, soaring oil prices would directly push U.S. inflation above 5%, which would not only shatter market expectations for Federal Reserve rate cuts but could even force the Fed to resume rate hikes.

Based on current assessments of global economic resilience, if the blockade lasts more than a month, the probability of a global recession will exceed 75%, and global GDP will contract by 1.5% to 3%.

It's worth noting that the last time the U.S. inflation rate reached 5% was in 2023, when the Fed's rate hikes directly triggered a banking crisis and sharp adjustments in global financial markets.

The economic environment in 2026 is more fragile than in 2023, with corporate and bank balance sheets under greater pressure and the Fed's policy room significantly reduced. If rate hikes are resumed, the chain reaction will far exceed the previous cycle.

The World Bank previously characterized the U.S. economic outlook as 'robust,' but as the conflict in the oil-producing region escalates, global shipping, supply chains, and commodity prices will be affected, putting this optimistic assessment to the test.

JPMorgan ( JPM) economist Joseph Lupton noted that a major support for the 2026 U.S. economic recovery is for companies to move past their cautious stance and start expanding investment and hiring. However, the U.S.-Iran conflict, combined with trade disputes, could reignite global stability concerns and interrupt this recovery process.

Notably, surging oil prices also drive a stronger dollar—a linkage often overlooked by the market. Historical data shows that for every 10% rise in oil prices, the U.S. Dollar Index typically appreciates by 0.5% to 1%.

This linkage will deal a double blow to emerging markets: first, energy import costs rise directly with oil prices; second, a stronger dollar increases the burden of servicing dollar-denominated external debt, further squeezing the fiscal space of emerging markets.

Combined, these factors will continue to tighten global financial conditions, risk asset valuations will face revaluation pressure, and market volatility will rise significantly.