Relief in financial markets after Iran ceasefire – but it is far from absolute | Richard Partington

A plunge in the oil price, stock market rally and renewed hopes for the global economic outlook. After the announcement of a two-week ceasefire in the Iran war, the relief in financial markets was palpable. But it is far from absolute.For the past six weeks, the economic damage had been steadily mounting, as the effective closure of the Strait of Hormuz by Tehran triggered the worst energy crisis of the modern era.Steps towards peace should limit further costs. Any progress towards reinstating shipments through the critical waterway for a fifth of global oil and gas supplies – in a world where fossil fuels still drive economic activity – will ease fears over an apocalyptic supply crunch.However, the situation remains highly volatile as Tehran and Washington issue conflicting messages about whether the Hormuz channel is open or not, and as Israel continues to strike Lebanon. With uncertainty over a durable peace in the Middle East, economic risks still remain.Enough damage has already been done to guarantee lasting consequences. Consumers are already feeling the pinch from prices for energy products that remain higher than before the war. Bombed-out oil and gas facilities, snarled-up shipping and halted production lines cannot be restored overnight.Even after the more than 10% fall in the oil price on Wednesday, Brent crude remains above $90 a barrel – significantly higher than before the start of the war, when the global oil benchmark traded below $73 a barrel.Relative to a lengthy conflict keeping the price above $100 a barrel, that still stands as progress. A worst-case scenario of persistently high oil prices could risk triggering recessions in multiple countries worldwide.However, despite the tentative steps towards peace, most economists forecast the oil price will remain above its prewar level throughout 2026.In its “baseline” postwar forecast, the consultancy Capital Economics predicts that the oil price declines but still ends the year at $80 a barrel. Under this scenario, headline inflation rises to about 3-4% year on year in the US and Europe, while GDP growth slows in most major economies.Economists say the unpredictability of both Iran and Donald Trump is adding to the uncertainty and risk. Before the conflict, few economists predicted Iran would follow through on threats to close the Strait of Hormuz.The prospect of shutting the crucial waterway had been raised by Tehran before, during the almost half-century of tension with Washington since the 1979 Iranian revolution, without ever being acted upon.Given the channel’s importance for its own economy and the rest of the world, and likely US response any closure would draw, the stakes were perceived to be too high. That logic has now changed.As a result, this lasting uncertainty could hit activity, or at the very least add an additional premium to the cost of doing business. For a region serving as a linchpin for the world economy, this will have consequences far and wide.In a timely report on Wednesday, the International Monetary Fund makes this warning. Typically, it finds, wars since 1946 leave lasting “economic scars” that can take more than a decade to recover from.“Persistent political and economic uncertainty despite peace can continue to depress expected returns on investment, sustain capital outflows, and constrain both investment and labor supply,” the report says. The situation in the Middle East provides a clear present-day example.