THE 1920s are widely known as the “roaring 20s” of economic prosperity before the Great Depression. However, the 2020s increasingly risk becoming a “warring 20s”, not least with the recent, growing tensions in the Middle East.
The context for these growing geopolitical tensions is a recent forecast by the World Bank that, by 2027, global gross domestic product growth may average just 2.5 per cent in the 2020s. This is the slowest pace of any decade since the 1960s.
While the current Middle Eastern tension dates back to at least the Hamas terror attacks of 2022, they have escalated significantly this month with the Israeli attacks on Iran, and countermoves in retaliation from Teheran. The significant downside risks that the conflict could grow may be under-priced by some financial market participants.
Israel Prime Minister Benjamin Netanyahu asserts that his country’s current military operation will “continue for as many days as it takes to remove this threat”, referring to Teheran’s nuclear weapons programme. Iran’s Supreme Leader Ayatollah Ali Khamenei, meanwhile, has warned Tel Aviv must expect “harsh punishment” for its strikes.
To be sure, crude oil futures have jumped in recent days as many traders assess that Israel’s attacks could be sustained. The Brent global benchmark for oil prices has hit its highest price in multiple months.
However, there is still no extensive discussion of the possibility of an 1973-74-style oil shock, which saw an embargo by Arab oil-producing nations in response to US support for Israel during the Yom Kippur War. The impact saw the cost of a barrel of oil nearly quadrupling in value in less than a year.
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Fast forward to 2025 and the Middle East remains a major global oil-producing region. Iran is the third-largest oil producer in the region, behind Saudi Arabia and Iraq. Despite international sanctions on its oil exports, Teheran still exports large amounts of crude, including to major Asian economies China and India.
One of the key questions in coming days is whether there may be moves to try to close the Strait of Hormuz, a key chokepoint for the global oil trade between Iran, the United Arab Emirates and Oman. About 18-19 million barrels of oil per day, about 20 per cent of global trade, passes through the area and Iran has previously pledged closure, which would leave oil tankers immobilised, fuelling further oil price rises.
JPMorgan asserts that closing the Hormuz Strait could lead to oil prices surging to a trading range of around US$120-130 dollars a barrel. This is nearly double the bank’s current base case forecast.
A related threat is shipping in the region. Many shipping firms have already issued warnings to their ships locally, and some are rerouting via the Cape of Good Hope rather than risk missile attacks from Iran-backed Houthi rebels in Yemen.
The global growth outlook could be dented by all these challenges, especially higher oil prices, not least as the price spike could keep inflationary pressures higher for longer. This may put further grit in the wheels for major central banks cutting interest rates.
At the G7 summit on Monday (Jun 16) and Tuesday, key leaders including Canadian Prime Minister Mark Carney, UK Prime Minister Keir Starmer, French President Emmanuel Macron and German Chancellor Olaf Scholz, urged Israeli and Iranian restraint. Even US President Donald Trump is calling for a deal to be done between Tel Aviv and Teheran.
Yet, as key G7 nations send more military assets to the Middle East, there is a growing, non-trivial possibility of a protracted war. With Iran’s religious leadership under heavy pressure and possibly existential risk amidst Netanyahu’s calls for “regime change”, assumptions that have long been made about strategic restraint in a conflict between the two powers may no longer be as clear-cut as before.
The downside risks in the Middle East are only one in a broader cocktail of potential global fissures. The macro context is that for several decades, there has been a long cycle of globalisation and geopolitical stability, but a new, riskier era appears to be underway.
So much so that there is growing risk of a broader poly-crisis with a number of overlapping challenges. So an era of successive, interconnected disruptions in which a permanent sense of crisis is a new normal.
This has implications not just for politics, but also financial markets too. While multiple stock exchanges around the world have recovered much or all of their losses since Trump’s “Liberation Day” tariffs in April, further volatility could yet be on the horizon.
The multiple global fractures now include those from health risks in the post-pandemic landscape; climate crises; and economic inequality. On the security front, there is the ongoing Russia-Ukraine war; the continuing threat from international terrorism; North Korea having acquired nuclear weapons; plus periodic tensions between India and Pakistan.
Such international political turbulence has been a recurrent feature for several years now. Several market commentators have asserted for years, perhaps since around 2016, that geopolitical risks are at a post-Cold War high.
Back then, 2016 was, of course, a key year when anti-establishment populists riding the anti-globalisation mood may have – so far – reached its apotheosis with the election of Trump as US president for the first time, and the United Kingdom voting to leave the European Union. What was so striking about both these events was that two of the countries previously known for their political stability, and being traditional rule makers of the international order, made the world more uncertain.
However, it may be China – one of the countries which is a relative bystander in several current crises including the Middle East and Ukraine – which may also have a very big bearing on whether the potential poly-crisis stabilises or worsens. For Beijing’s rise to power has the potential to be either a growing source of tension with Washington and the wider West – or, just possibly, a more productive partnership.
Growing bilateral rivalry, rather than an increasingly cooperative relationship, is the most likely scenario for future relations, despite the recent China-US tariff deal. However, there remains a slim possibility that a different future is possible – one with more bilateral economic cooperation which leads to less tension on security issues.
The direction of that bilateral relationship is therefore a massive uncertainty for the remainder of the decade, and beyond. The outside possibility of a more cooperative relationship may yet offer a prospect of a different future, although the chances of that happening are growing slimmer.
The writer is an associate at LSE IDEAS at the London School of Economics
