Guest Articles

Iran finds itself back on the brink of war, with mounting concern across the region over how a potential conflict could unfold and what it would mean for Middle Eastern economies and geopolitics. 

We do not expect US military threats alone to compel the Iranian regime to alter its stance, reform or collapse in the near term, increasing the risk of direct action. On balance, we expect the US, supported by Israel, to attack Iran through swift, strong and targeted air strikes, with the intention of resolving the nuclear issue, nullifying military threats and creating space for regime change. 

At present, we assess a high probability of US military strikes against Iran, assigning a 60% likelihood that action occurs by mid-year or earlier. The scope of US intervention, the nature of Iranian retaliation and any shifts in Iran’s leadership structures will be critical in determining the regional economic, political and security fallout.

US-Iran conflict scenarios

We have outlined three possible scenarios, which involve US-led strikes on Iran and different forms of retaliation and response by the Iranian regime. In this article we explore the likely economic, political and security impacts on Iran and other major countries in the Middle East under our baseline scenario. We can provide further analysis on the alternative and tail -risk scenarios. 

The three scenarios are our baseline scenario, “regime capitulation”, in which the Iranian regime weathers the initial storm and survives but find itself in a greatly weakened state, resulting in it capitulating to outside and internal pressures and leading to more productive negotiations on its nuclear ambitions and missile programmes; our main alternative scenario, “regime militarisation”, in which the attacks cause the ayatollah-led theocratic regime to fracture and the Iranian military to assume full state control led by the IRGC; and our tail-risk scenario, “regime collapse”, whereby the regime lashes out and then crumbles, which entails Iranian forces and proxies attacking US assets, commercial shipping and nearby states before the country slips into a power vacuum and civil war.

Baseline scenario: regime capitulation and negotiation

An intense, brief and targeted air campaign by the US, with Israeli support, aims to further degrade Iran’s nuclear and ballistic missile programmes, undermine the control and cohesion of the Iranian regime, and force Iran back to the negotiating table on better terms. Air strikes are likely to target Iran’s air defence systems, missile launch sites, nuclear facilities, security forces and energy infrastructure, and we assume that the US would probably implement a partial maritime blockade to intercept Iran’s shadow fleet.

Under this scenario, Iran’s retaliation against US facilities and forces are limited and mostly pre-warned, and the regime resists the temptation to activate its proxies in Iraq, Lebanon and Yemen. The Iranian regime withstands the initial attacks—largely because command-and-control structures have been tightened and are more widely dispersed since the attacks in June—but quickly seeks a ceasefire while indicating it will moderate its policies and stance on nuclear and missile negotiations. The capitulation reflects an element of pragmatism as the Iranian regime finds itself under intense pressure and in survival mode, looking for an off-ramp.

Under our baseline scenario, we expect a very modest impact on regional economies apart from Iran. Economies across the Middle East are expected to largely shrug off renewed US-led air strikes against Iran that play out over a short period and prompt little to no significant retaliation from the Iranian regime. Iran remains subject to tight international sanctions and stuck in a slump—characterised by failing infrastructure, high unemployment, banking sector distress, currency collapse and hyperinflation. Iran would experience short-term disruption to energy exports, but trade would quickly resume and a US blockade on its shadow fleet would ease as part of a carrot-and-stick approach to regime compliance and to avoid creating tensions with major Asian buyers of Iranian oil—most notably China and India. Gulf Co-operation Council (GCC) states would breathe a sigh of relief as tensions quickly settle in a way that allows international energy and non-energy trade and investment return to business-as-usual conditions. Economic conditions in Israel would continue to improve after more than two years of war since the attacks launched by Hamas on southern Israel on October 7th 2023.

International logistics operations in the Middle East would experience a slight deterioration of trading conditions—specifically maritime traffic transiting the Persian Gulf and the Red Sea. Some additional rerouting of international shipping away from Middle Eastern danger zones would be expected during the initial attack phase, but, more importantly, major shipping companies would adopt a longer wait-and-see approach to resuming Red Sea shipping for much of 2026 and 2027. Red Sea transit volumes through the Suez Canal slumped in January 2024 and were still about 58% below 2023 levels at the end of 2025, with many companies continuing a risk-mitigation strategy of shipping around the Cape of Good Hope. Shipping companies transiting the Middle East would experience a further modest rise in war risk premiums that would push up insurance and transaction costs—premiums have been elevated since October 2023, particularly for shipments passing through the Strait of Hormuz in the Persian Gulf and the Bab al-Mandab Strait in the Red Sea. Higher insurance and transaction costs would be capped by the short-term nature of the attacks, rapid de-escalation and the beefed-up security presence of the US Navy and other national security forces.

International oil prices are likely to edge higher, but the impact would be short-lived. Oil prices have increased in January and early February to about US$66-68/barrel in part because of slightly higher geopolitical risk premiums associated with tensions in the Middle East. US-led strikes on Iran would push geopolitical risk premiums higher still, and some short-term disruption to Iran’s oil exports would add to immediate energy market volatility and price pressures. Oil prices could rise to about US$80-85/b, as they did during the 12-day war between Israel and Iran in June 2025, but would quickly drop back within a few weeks as tensions de-escalate, Iranian exports resume and risk premiums recede. The global oil market is oversupplied and as market conditions settle, we would expect oil prices to slide back towards US$68/b by the end of 2026.

Travel, tourism and hospitality would probably experience short-term disruption but avoid another major downturn. International tourist arrivals would suffer a very short-lived reversal across the GCC due to closed airspace, flight cancellations and diversions, and higher security risks in the region. However, GCC tourism sectors proved resilient in 2025 despite the 12-day war between Israel and Iran, and US strikes on Iranian nuclear facilities would probably recover any lost business before the end of 2026. Tourism industries in Israel and, especially, Iran would remain under pressure and struggle to recover from major setbacks in mid-2025 and again in the first half of 2026. One risk would be the lingering image of another conflict in the Middle East that could dampen previously solid tourism sector growth rates across the GCC in 2026 and 2027.

International investor sentiment towards the Middle East—and particularly the GCC states—could falter but quickly recover. International investors have proved adept at absorbing shocks in recent years, including conflict in Europe and the Middle East, and trade tensions between major global powers. Stockmarkets in the GCC would be likely to suffer a very short-lived and modest dip but to quickly recover as conditions settle and confidence returns. The exception could be Saudi Arabia, where investors appear concerned about the sustainability of government borrowing and investment plans given the squeeze on the public finances created by relatively low oil prices and subdued fiscal revenue. Investor appetite for GCC debt will probably remain very strong given the modest impact on economic fundamentals, high credit worthiness and substantial financial buffers. Inward foreign direct investment to the GCC, which has a longer-term view and would ride the initial storm, would retain an upwards trajectory and help to drive capital inflows higher in 2026 and 2027.

Key takeaway

We believe the US is more likely than not to attack Iran, with Israeli support. We have considered three scenarios, and none have net positive implications for the Middle East in terms of economic, political and security impacts. US intentions, Iranian retaliation and possible outcomes are highly uncertain and fraught with major risks to regional economic growth, stability and security. A rapid-fire exercise with little real Iranian response that pushes the regime to renegotiate nuclear and ballistic missile deals is the best possible outcome, but there is a strong chance that the conflict could spiral and result in much graver impacts that greatly unsettle the Middle East.

Author: 

Robert Willock, Global Director, Economist Intelligence Corporate Network

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