The rhythm of the global economy has once again been disrupted by conflict. Over the past week, the Middle East has become the epicenter of fresh turmoil, with military operations widening, commodity markets under strain, and civilian life increasingly unsettled. What began as a confrontation between a few actors has now spilled across borders, drawing in multiple states and sectors of the global system. Energy markets, transport networks, and financial exchanges have all felt the tremors, while humanitarian pressures mount in the region itself. The pace of events has been rapid, and the uncertainty surrounding their trajectory leaves governments, businesses, and households alike bracing for further shocks. At the time of writing, the crisis remains fluid; events in the coming hours, days, or weeks may either deepen instability or offer a measure of relief. Accordingly, the views expressed below are provisional and may change as the war plots its course.
This Week’s Developments
The past week marked a sharp escalation in the conflict, as the United States carried out its largest bombing campaign to date against Iranian military infrastructure in Tehran and Isfahan, prompting retaliatory missile and drone strikes on US bases in Iraq and Syria as well as Israeli cities including Tel Aviv and Haifa. Iran’s response spilled further into the region, with Gulf states such as Dubai, Abu Dhabi, Qatar, Kuwait, and Bahrain hit by drone incursions and missile attacks on strategic infrastructure, such as oil production facilities and airports.
Against this backdrop, President Donald Trump declared that Washington’s objectives extend beyond military action to shaping Iran’s political succession, rejecting the candidacy of Ayatollah Khamenei’s son, Mojtaba, and insisting the United States must be directly involved in deciding the country’s next leader. In contrast, Iranian President Masoud Pezeshkian sought to reassure neighbouring states by announcing that Iran would halt further strikes on Gulf countries, stressing that operations would remain focused on US and Israeli targets unless Gulf territory was used to launch or support attacks against Iran.
What could this mean for the global economy and trade?
The energy shock was the most immediate and visible consequence of the week’s developments. Brent crude’s climb above $93 per barrel marked its highest level in months, driven by fears of supply disruption through the Strait of Hormuz. With nearly one‑fifth of global petroleum shipments passing through this narrow waterway, the withdrawal of insurance coverage for tankers effectively froze traffic, forcing refiners in Asia and Europe to scramble for alternative supplies. In the United States, gasoline prices jumped by more than 10% in a matter of days, adding pressure on households already grappling with elevated living costs. The surge in fuel prices also fed into broader inflationary expectations, with analysts warning that higher transport and production costs could ripple across consumer goods and services worldwide.
Financial markets reflected the turbulence with sharp swings. The Dow Jones Industrial Average fell nearly 800 points mid‑week, erasing billions in market value and underscoring investor anxiety. European and Asian indices also registered losses, though oil majors and energy‑linked stocks gained ground as investors sought refuge in sectors poised to benefit from higher crude prices. Safe‑haven assets surged: gold climbed to multi‑month highs, while currencies such as the Swiss franc and Japanese yen strengthened against the dollar. Emerging market currencies, particularly those of oil‑importing economies, came under pressure as rising import bills threatened to widen current account deficits and weaken exchange rates.
Shipping and logistics were equally strained. With tanker traffic through Hormuz curtailed, freight costs surged as vessels were forced to take longer routes. Container shipping faced delays, disrupting supply chains for goods ranging from electronics to agricultural commodities. Insurance premiums for vessels operating in the region spiked, adding further costs to global trade. The paralysis of one of the world’s most critical maritime chokepoints underscored the vulnerability of supply chains to geopolitical shocks, raising concerns about the resilience of global commerce.
How will Sri Lanka be impacted from this?
Sri Lanka found itself unexpectedly in the spotlight as two Iranian naval vessels became entwined with the unfolding conflict. The first, an Iranian warship, was sunk off Sri Lanka’s southern waters near Galle during US led strikes, with dozens of sailors killed and survivors rescued by the Sri Lankan navy. Just days later, a second Iranian vessel docked in Colombo, carrying more than 200 crew members, including cadets and senior officers. These incidents placed Colombo at the edge of the battlefield, raising both humanitarian and diplomatic challenges as the country coordinated recovery operations while avoiding deeper entanglement in the war.
The government has already warned of fuel and gas price hikes, as disruptions in the Strait of Hormuz threaten to choke supply lines and push up import costs. For a nation heavily reliant on imported petroleum and cooking gas, even modest increases tend to translate quickly into inflationary pressures, for instance, via higher transport fares and electricity bills. The tourism sector, a vital source of foreign exchange, is also under pressure. Airlines have begun rerouting flights to avoid conflict zones, which lengthens travel times and raises ticket prices. These higher costs, combined with global traveler caution, may have led to cancellations and reduced arrivals in Sri Lanka.