What was the market reaction to the Israeli attack?

The economic fallout of Israel's attack on Iran's nuclear and ballistic missile facilities in the early hours of Friday was swift. Oil prices spiked and investors shifted out of stocks and into safe-haven assets, including government bonds and gold.

Crude oil futures jumped by as much as 13% as traders bet that Israel's attack would not be a one-off. The Brent global benchmark for oil prices surged more than 10% to $75.15 per barrel, hitting its highest price in almost five months.

A war of words between the two foes fueled fears of a protracted conflict, with Israeli Prime Minister Benjamin Netanyahu vowing that the military operation would "continue for as many days as it takes to remove this threat," referring to Tehran developing nuclear weapons.

Iran's Supreme Leader Ayatollah Ali Khamenei, meanwhile, warned that Israel must expect "harsh punishment" for its strikes.

Asian and European stocks declined at the open, with Germany's DAX index hit hardest. The S&P 500 and Nasdaq opened about one percentage point lower later Friday, as traders continued to pour into less-risky investments.

In Europe, the travel and leisure sector was hit hard, energy stocks rallied, along with defense giants, including Rheinmetall and BAE, which spiked between 2-3%.

"The effects of the attack have cascaded across global markets, with a strong risk-off move for several asset classes," wrote Deutsche Bank analysts in a research note.

The analysts said the strikes had spurred "significant fears about an escalation and a wider regional conflict."

What is the immediate economic impact?

Israel and Iran have closed their airspace, along with Iraq and Jordan. Several airlines canceled flights to the region, as fears rose that the conflict could bring down a plane.

Globally, six commercial aircraft have been shot down unintentionally since 2001, with three near-misses in that time, according to aviation risk consultancy Osprey Flight Solutions.

Rerouting flights, however, is a costly exercise, as it increases journey times and planes require additional fuel.

Fears of further retaliatory attacks by Iran have forced Israeli airlines to relocate some of their planes overseas from Tel Aviv's Ben Gurion Airport.

Flight tracking data showed several jets leaving Tel Aviv on Friday morning local time. Some were flown to Cyprus and elsewhere in Europe, without passengers.

The Israeli shekel currency slid nearly 2% against the dollar on Friday as Israel announced a "special state of emergency," which appeared to spur some panic buying.

Social media accounts showed scenes of large crowds at supermarkets and empty shelves for some foods. 

Israeli media outlet Ynet cited supermarket chain Carrefour reporting a 300% increase in footfall on Friday.

What is the biggest economic threat from the Israel-Iran attacks?

An all-out war between Israel and Iran could disrupt energy markets and trade routes in the region, which would have ripple effects globally.

The Middle East is a major global oil-producing region, home to some of the world's largest oil reserves and producers.

Iran is the third-largest oil producer in the region, behind Saudi Arabia and Iraq. Despite international sanctions on its oil exports, the Islamic Republic still delivers significant amounts of crude to China and India.

Barclays analyst Amarpreet Singh warned in a research note that in a worst-case scenario, "the conflict could expand to other key oil and gas producers in the region, and shipping."

All eyes are now on the Strait of Hormuz, a narrow waterway between Iran, the United Arab Emirates and Oman, a key choke point for the global oil trade. If it were to be closed, as Iran has threatened several times, oil tankers would be stranded and oil prices could spike even higher.

About a fifth of the world's total oil consumption passes through the strait — around 18-19 million barrels per day, according to the US Energy Information Administration (EIA).

The price of oil affects the prices consumers pay for everything from fuel to food.

How could a longer conflict impact the global economy?

The Israel-Iran tensions are escalating at a time of heightened uncertainty in financial markets, driven by US President Donald Trump's on, off, on-again tariff policies.

The threat of steep levies on imports to the United States has already disrupted global trade and rattled investors. These tariffs have spiked costs for consumers and businesses, slowing economic activity worldwide.

A prolonged conflict between Israel and Iran could worsen these pressures as every 10% increase in the price of oil adds about 0.4% to consumer prices over the subsequent year, a 2019 analysis by FXStreet found.

A multi-front conflict involving Iran-backed groups like Hezbollah in Lebanon or the Houthis in Yemen could paralyze shipping and tourism.

The Houthis began attacking commercial vessels in the Red Sea in late 2023, another critical area for global trade.

The attacks caused an increase in shipping rates and prompted global shipping giants to reroute vessels around the Horn of Africa, which added time and huge costs to journeys.

Peter Sand, chief analyst at the Copenhagen-based Xeneta research, said any further rerouting would raise shipping rates, with "carriers likely also pushing for a ‘security surcharge’ on these trades."

Reuters news agency reported that Greece and the UK have advised their merchant shipping fleets to log all voyages through the Strait of Hormuz following the latest escalation.

Disruptions to regional gas supplies, including Israel’s Tamar field or Gulf exports of liquefied natural gas (LNG), would also add pressure to European and Asian energy markets.

Israel's economy is already strained by the ongoing Gaza conflict, and a broader war with Iran could potentially push costs to $120 billion or 20% of GDP, according to Israeli economist Yacov Sheinin.

Iran remains in economic crisis due to international sanctions over its nuclear program, which have limited its oil exports. The Iranian rial remains weak and inflation is stubbornly high at around 40%. Any further disruption to oil exports would ripple globally.

While analysts recently lowered the odds of a downturn, the combination of Trump's tariffs and a lasting Middle East war would significantly raise the risk of a global recession.

Edited by: Ashutosh Pandey