The economic consequences of the Iran attack
The US and Israel have again combined world-leading military and intelligence capabilities to deliver a major blow to Iran. The market response is roughly as expected: energy prices are up, along with some commodities, on disruptions to movements through the Straits of Hormuz; the USD has strengthened; and global equities are down, particularly in Europe and Asia due to their exposures to higher energy prices. The US is more resilient to these shocks.
But beyond the near-term outlook for the conflict, and the accompanying economic and market impact, this action will have important structural consequences. My assessment is that this will accelerate the process of regime change underway to a more fragmented, competitive, diversified global system, with rewired global flows. This implies a profile of exposures that are quite different to the initial market response and to the consensus view.
Near-term outlook
There is particular uncertainty around the near-term outlook. Presidential decision-making is heavily personalised; Mr Trump has a high risk tolerance; the stated objectives are unclear and shifting; and so on. However, on the upside, this provides more tactical flexibility to change course quickly.
Asked… if there were any limits on his global powers, Mr Trump said “Yeah, there is one thing. My own morality. My own mind. It’s the only thing that can stop me”, New York Times, 8 January 2026.
Of course, military processes, once started, are difficult to control. Iranian forces are deliberately decentralised; Israel is pushing for maximalist aims; and a retaliatory cycle is possible if Iran’s cheap drones and missiles can overcome expensive interceptors. Negative scenarios are very plausible as well.
To impose some structure on a deeply uncertain situation, consider three illustrative scenarios with rough probability weights.
Venezuela (~50%): Mr Trump declares unilateral victory within a fortnight, declaring he has achieved his goals. A rebadged version of the regime stays in place with degraded capabilities, perhaps with some energy-related deal. This limits economic costs, and markets reverse much of the initial pricing.
Iraq (~25%): The Iranian regime collapses into political chaos. A sustained US military presence is required to safeguard Gulf oil production and shipping. A higher risk premium persists across the Middle East, but global economic costs are contained.
Ukraine (~25%): The conflict expands and escalates, including out of region attacks. No politically sustainable exit ramp is available for any party. Hormuz Straits shipping is severely disrupted. This generates substantial, sustained global economic impact, with costs concentrated in energy-importing Europe and Asia.
Structural dynamics
Even in the more positive scenarios, the attack on Iran will have consequential structural effects. This episode intersects with the regime change underway from the market state to a state capitalism regime. From this perspective, the key structural impact of the Iran attack will be an accelerated rewiring of international alliances and of trade/capital flows.
First, strategic autonomy and supply chain resilience initiatives will strengthen. Around 20% of world oil and gas transits the Hormuz Straits. Even a temporary disruption to energy and other flows will concentrate minds. In a world where the US is prepared to use hard power aggressively and without constraint, supply chain exposures (in the Middle East and beyond) need to be fundamentally reassessed.
Expect increased investment in energy independence, particularly renewables and nuclear. Indeed, China’s rapid electrification has been importantly motivated by energy security goals. New patterns of trade and energy flows across Eurasia are also a plausible response. For example, Europe, already constrained by high energy costs, may become pragmatic about Russian energy imports as part of any eventual Ukraine settlement. And expect more stockpiling of strategic commodities, including energy.
Much of this is structurally inflationary, in addition to the near-term impact. Countries will invest in strength and resilience rather than efficiency. Higher government spending, frictions on global flows, and geopolitical competition for resources will add to the inflationary pressures that are already building in advanced economies.
Second, US de-risking will intensify. The conventional read of the geopolitical impact of the Iran attack seems to be that the US has demonstrated hard power and intelligence supremacy; that China and Russia have lost a partner and could not protect it; that Western countries have been successfully pressured into support; and that safe haven flows into the USD reflect enduring US economic centrality. On this view, the episode strengthens US hegemony.
But I’m not sure that’s entirely right. This attack comes at a time when global economic and geopolitical regime change is underway, creating an unusually fluid situation.
Over the past year, an increased political risk premium has attached to US assets, notably after Liberation Day. The attack on Iran will reinforce this. The unconstrained, unilateral nature of decision-making by the Trump Administration shows that there is a revisionist power at the centre of the global system. This implies potential for other economic exposures to be weaponised over time.
The US was an attractive hegemon for 80+ years because it exercised unprecedented restraint. And it built a system of alliances and institutions that provided security benefits to partners. But from NATO and Greenland to tariffs and the Middle East, the US is now resetting its engagement with the global system. The Iran attacks reinforce this perception. It is no longer fantastical for Western-oriented countries to regard the US as a threat as well as an ally.
In response, many countries will step-up US de-risking: building greater independent capabilities in security and technology, strengthening alternative relationships, as well as reducing capital allocations to the US: more home bias, more diversification.
Diversification, interrupted
Markets are selling Europe and Asia this week, and buying the US. That makes sense given near-term economic exposures to higher energy prices. But it may not be the right response over a longer horizon. The diversification trade away from US assets that worked through recent months is likely to reassert itself after the current disruption because the regime change logic that drove it has not reversed. Indeed, the pace and scale of global regime change is strengthening.
The US has shown again that it can project unrivalled military force. But unconstrained power, exercised unilaterally and unpredictably, generates its own backlash. Countries and investors will adapt to reduce exposures. Economic relationships, trade flows, and capital allocations are downstream of geopolitical arrangements; and as the geopolitical system rewires, global flows will shift.