Faisal Islam: Iran war pause is welcome but the economic scars will last

Faisal Islam: Iran War Pause Offers Relief, Yet Economic Aftermath Lingers

Over the last six weeks, global attention has been fixated on the Strait of Hormuz, where maps depict a chaotic bottleneck. Around 800 vessels are estimated to have been stranded in the Gulf, many carrying oil and gas, unable to navigate beyond the region’s shores. This situation has linked the world’s largest maritime bottleneck to climbing fuel costs, elevated airfares, and increasing mortgage rates worldwide. Countries rely on these waters not only for oil but also for other petrochemical goods processed in regional refineries, such as jet fuel, diesel, fertilizer components, and helium, vital for microchip production.

The recent overnight ceasefire has halted the conflict’s escalation, offering a route toward deescalation and peace. Markets have reacted positively, with oil and gas prices dropping by 15% and stock markets rebounding. However, lingering concerns about the economic fallout persist, particularly as negotiations between Iran, the US, and Israel remain unclear. The success of this pause hinges on whether direct talks materialize, and whether the Strait’s traffic will resume unimpeded.

Strait Control and Global Implications

While the US President Donald Trump suggested unobstructed movement through the Strait, Iran’s Foreign Minister proposed a coordinated approach with its military and technical constraints. This distinction matters for more than just oil; it also affects the flow of jet fuel, sulfur, urea, and diesel. The duration of the ceasefire could determine if inflation spikes subside, but the long-term economic scars of the conflict remain uncertain.

Iran has redefined its role in the Gulf, proving it can manage a critical maritime chokepoint without a navy or air force. It even began charging tolls for passage, raising questions about whether this control will be accepted by Gulf nations. The proposal to share governance of the Strait with Oman signals a shift in regional dynamics, potentially transforming it into a high-value toll system with millions in transit fees.

Though the conflict has paused, the economic toll is already evident. Infrastructure damage, particularly in Qatar, threatens global gas production for years. Restarting operations will take weeks, with full recovery requiring years. To stabilize energy costs, a steady stream of liquified natural gas (LNG) tankers from the Gulf is needed until summer. Europe’s efforts to replenish gas reserves will be key in this regard.

A modest rise in UK energy bills is expected in July, but the anticipated sharp increase in October may now be avoided. A contained inflation scenario could also prevent further hikes in interest rates. Markets have already seen a drop in European government borrowing costs, including the UK’s five-year gilt rate, which fell by a quarter percentage point. This relief could ease pressure on fixed mortgage rates, which might begin to decline if the ceasefire holds.

From the outset, the economic consequences of the war have been central, not incidental. Iran’s actions in the Strait have showcased its global economic influence, leveraging a vital trade route to shape market conditions. Yet, the underlying diplomacy remains fragile, with uncertainties about how the war will affect prices, interest rates, and economic growth. The potential for oil prices to reach $200 per barrel earlier this week has been averted, and a return to $60 to $70 per barrel now appears plausible. As finance ministers gather in Washington DC for IMF meetings, the absence of further conflict is a welcome reprieve for the global economy.