The global economy is already sick, infected by a crisis virus spreading through supply chains after the war in Iran shifted from temporary disruption to irreversible destruction.

“We are facing a real shock that is probably beyond what we can imagine at the moment,” said European Central Bank (ECB) head Christine Lagarde in a recent interview.

She went on to say that people are being optimistic, maybe overly optimistic, that we can go back to normal in a relatively short time. “But that is not what technical people are telling us. Too much damage has already been done… and there is no way that it can be restored in a matter of months.”

The economic shock triggered by the Iran conflict is no longer being viewed by economists as a temporary disruption. In the first week of the crisis economists were saying that it wouldn't last more than a few weeks and that $150 oil was the extreme scenario. In the last week $150 oil has become the best case scenario for many. If US President Donald Trump attempts there is a land invasion – and some 10,000 troops are on their way to the Gulf – now analysts are talking about $200 oil and a global recession that goes on well into 2027.

to energy markets, but as a deeper, more persistent process — one that is beginning to resemble a “crisis virus” spreading through the global economy.

At the heart of this shift is a transition from disruption to destruction. The US-Israeli airstrikes on Iran’s Asaluyeh gas plant on March 18 and Tehran’s retaliation on South Pars gas complex in Qatar on the same day locks in many of the worst case outcomes. As bne IntelliNews reported, the damage to the Ras Laffan LNG plant will take a minimum of one year to fix and possibly five years.

In the meantime, production of LNG will be down by 17% leaving a big hole in the market. but not only to LNG. Fertiliser production will be affected, which will affect crop yields at the end of summer. Soaring food prices this autumn will stoke an inflation shock and that will make the cost-of-living crisis worse that will spill into next year. Helium production will be affected, which will affect semiconductor production in 45 days when stockpiles begin to run, which will affect AI and datacentre rolls outs later this year. Plastic producers and petrochemicals are already being affected. And so on.

The pain is spreading out through the global economy as the crisis-virus spreads out and progressive infects more and more of supply chains. Even if Tehran’s blockade of the Strait of Hormuz were lifted tomorrow, the inflection would continue to spread. The body of the global economy is going to get sicker before it starts to recover.

The virus takes hold

Early market turmoil, driven by shipping delays and risk premiums, was in principle reversible. But sustained attacks on infrastructure — most notably to Ras Laffan — have removed supply capacity that cannot be quickly restored. That distinction is critical. Disruption allows markets to snap back. Destruction changes the baseline.

“We are not only talking about an energy crisis in the conventional sense,” wrote economist Gabor Scheiring in a recent blog. “We are looking at the making of a global commodity shock transmitting simultaneously through energy, industrial, agricultural, and chemical supply chains.”

This transmission is neither immediate nor linear. Like a virus, it spreads with a lag. Peak pain will come many months after the launch of Operation Epic Fury on February 28.

Stockpiles, strategic reserves and existing contracts delay the visible effects, even as underlying damage accumulates. For example, many customers of LNG have bought their gas using long-term contracts with fixed prices and airlines have hedged the price of kerosene to protect themselves against spikes. But these deals and options run out, throwing more hungry companies into an increasingly tight market.

In a note to clients, Oxford Economics noted that disruptions to gas flows may not cause immediate shortages but could “delay the build-up of reserves in preparation for Europe’s next winter” that will add to the gas crisis that Europe was already in before the start of the war thanks to this winter’s big freeze.

Energy markets as the index case

There remains broad consensus that energy is the primary transmission channel and the closing of the Strait of Hormuz on March 2 by the Iranian Revolutionary Guard Corps (IRGC) is the “index case” in the growing epidemic.

Oxford Economics estimates that even partial disruption could remove around 4mn barrels per day of oil supply in the second quarter, pushing Brent crude towards $80 per barrel. More severe scenarios point to prices above $100, with Goldman Sachs modelling cited by Scheiring suggesting $150 in extreme cases, assuming no more production facilities are destroyed.

Capital Economics warned that a prolonged conflict with infrastructure damage could eliminate up to 8% of global energy exports — “the only comparable global supply shock is from the late-1970s to mid-1980s”.

Gas markets are more exposed still. Qatar, which accounts for nearly 20% of global LNG exports, cannot reroute shipments around Hormuz. This shifts the shock firmly into the realm of destruction, embedding tighter supply conditions over the medium term.

A related problem is that with Qatar temporarily sidelined and Russia out of the game thanks to sanctions, that leaves only the US on the field, and given Trump’s unpredictability and propensity to decapitate regimes he doesn’t like, this mono-market set up is making leaders across Asia very nervous.

Inflation and policy to containing the infection

If the first symptom of the crisis-virus infection is spiking commodity prices, the second stage is inflation. Higher energy costs are feeding into broader price pressures, raising the risk of second-round effects.

Fitch Ratings estimates that under a prolonged conflict scenario, global GDP would be about 0.8% lower after four quarters, while inflation across major economies would be 1.3 percentage points higher.

Oxford Economics warned that central banks are increasingly sensitive to these risks, noting that policymakers may no longer be willing to “look through” energy shocks if inflation expectations begin to shift.

As bne IntelliNews reported, the $30 trillion US Treasury market is already exhibiting mounting signs of stress as geopolitical tensions in the Middle East rise. The BRICS nations were already accelerating their sell off US T-bills after the Trump administration launched the Liberation Day tariffs, but that sell off could accelerate now as the start of the Gulf war represents another “step-event”, similar of the oligarch sanctions on Russia in April 2018 that caused the Kremlin to dump its T-bill holdings: it sold $80bn of treasury bills in two months on that occasion.

Here, however, views diverge. The European Central Bank is seen as particularly exposed: in moderate scenarios it may hold rates steady, but in more severe cases it would “act quickly and forcefully, according to Lagarde.” By contrast, former US Treasury secretary Janet Yellen said the Federal Reserve remains in a “wait-and-see position”.

This divergence reflects uncertainty over how far the infection will spread — and whether tightening policy risks exacerbating the slowdown, making it a self-fulfilling prophecy. During the March round of monetary policy meetings most central banks chose to keep rates on hold. (Russia even cut its rates by 50bp.) But many have already indicated that cuts are most off the table for now and economists are confident that the most exposed markets – including India, Poland and Turkey – are highly likely to hike at the April meetings.

It is this sharp about face from expectations of cuts this year to hikes that is doing so much damage on bond markets – another symptom of the slow moving spread of the crisis-virus – as yield curve predictions have been turned on their head. The Fed, Bank of England and ECB have all become notably more hawkish on inflation in the last month.

Financial markets and growth transmission

Financial markets represent another key transmission channel. As in previous shocks, falling equity prices risk amplifying the downturn. So far the booming US equity market has been relatively unaffected. But then the virus needs a few months to gestate.

“Plunging equity prices could lead to the AI infrastructure investment boom fizzling out and dampen consumer spending,” Oxford Economics warned, highlighting the growing importance of wealth effects to drive the US economy. One of the facts that should worry is that thanks to the feedback loop, where the Gulf states sell oil for dollars and then plough that money back into dollar-denominated assets – Gulf investors are heavily exposed to AI stocks – if they start to suffer from current account problems as a result of falling export revenues, they are already talking about selling part of their portfolios that could send US stock markets into a death-spiral similar to 2008 if the war goes on too long.

Fitch’s more moderate model suggests that these financial channels could account for roughly half of the drag on US growth in a downside scenario. Under its adverse case, US growth in 2026 would slow to 1.5%, with eurozone growth falling below 1%.

Here too, the virus dynamic is evident: the initial shock weakens confidence, which then feeds back into spending and investment, further spreading the downturn.

Beyond energy: a systemic commodity shock

Where some analysts, and as Lagarde points out, go further is in arguing that this is no longer just an energy crisis. The transition from disruption to destruction made this a much broader crisis, thanks to the Hormuz stoppage of things like fertilisers, aluminium and helium — each critical to different parts of the global economy.

Scheiring warned that the closure of the strait has removed not just energy supplies but also key inputs across industrial and agricultural supply chains. “We are looking at the making of a global commodity shock,” he wrote.

That means delayed but compounding effects — from food price inflation to disruptions in semiconductor production — that is very hard to stop once it gets going. Like disinflation, once prices start to fall, it is very difficult to break out of the negative-feedback loop that leads into stagnation, or even stagflation, like the UK experienced in the 1970s that can go on for years.

Uneven impact and global faultlines

The spread of the shock is highly uneven. Poor countries that are heavily dependent on fossil fuel imports are most exposed. “The pain is distributed in inverse proportion to the power to inflict it,” Scheiring wrote.

However, some of these countries, like India, that have large idle coal-fired generating capacity and strong fiscal buffers are better equipped to cope with the storm. Europe is better off than it was during the last energy shock in 2022 thanks to the rapid roll-out of green generating capacity; half of Europe’s energy came from renewables in 2025. As the Gulf mainly feeds Asia, Asia will take the brunt of the pain.

Nevertheless, Europe remains the most exposed advanced economy, given its reliance on imported energy and already low gas storage levels. Economists expect higher inflation and rising recession risks.

The US, by contrast, is relatively insulated as a net energy exporter, while some commodity producers may benefit from higher prices.

The sharpest effects are expected in the developing world. “Energy and financial crises in many Global South countries are already imminent,” Scheiring warned, pointing to currency depreciation, rising import costs and acute fiscal pressures.

Duration will determine the severity — but not the direction

Across all the forecasts reviewed by bne IntelliNews, there is strong agreement on one point: the duration of the conflict will determine how far the virus spreads.

Short disruptions can be absorbed, but the war has already passed this point. Prolonged damage to infrastructure and shipping routes risks embedding structural shortages and this crisis has already gone on long enough to result in a vintage crisis like the Asian-Russian meltdown in 1997-1988, the Great Financial crisis of 2008, and the COVID-19 crisis in 2020.

The virus framing strongly suggests the uncomfortable reality that a crucial point-of-no-return has already been crossed. The initial week of war produced a disruption after international insurance companies suspended oil tanker war risk policies. But a deal with Tehran, or its capitulation, would have quickly returned things to normal. The pain would have been like twisting your ankle – nasty but not lasting more than a few weeks.

Now the conflict has moved into a destruction phase the global economy is now infected with the virus and will get sicker before getting better. The attack on Ras Laffan has already changed the shape of the global gas market with effects that will last for years, not months.

The open question remains: how much more damage will be done. Donald Trump has extended his deadline for Iran to open the Strait of Hormuz or see “irreversible damage” to Iran’s power sector by ten days to April 6. If he carries through on this threat then Iran will retaliate in kind. Not only will that result in much of the oil and gas production infrastructure being destroyed, it would also take most of the desalination plants offline and end the supply of drinking water for most of the region, leading to a mass exodus as the region becomes uninhabitable. Then it’s not just a question of the crisis-virus making the Gulf sick but killing it off completely.