At the outset of any escalation in geopolitical conflict, the humanitarian cost of military action will be the first question for many. When tensions between the U.S. and Iran erupted into war this weekend, economists were mindful of the potential loss of life and livelihoods. Still, they observed that the reaction in financial markets was rational.
As traders return to their desks today, it will be those on energy and oil teams who will have the most complex in-trays to unpick, with supply chain disruption widely expected (and in some cases, already risks already priced in) as a result of the chaos that unfurled in the Middle East over the weekend.
From a macroeconomic lens, UBS’s Paul Donovan told clients this morning, there are four considerations. Most obviously is the consequence of higher oil prices and how that trickles through to the inflation number—a particular concern for U.S. economists whose ears are pricked for any further threats to affordability.
The second is whether global trading routes will be disrupted and slowed, with the Yemen-based Houthi military potentially launching attacks on ships passing through the Red Sea. The Red Sea is a vital trading route between the East and West, sitting between the continents of Africa and Asia. It funnels into the Suez Canal, which leads to the Mediterranean Sea, meaning if ships could not pass through the Red Sea in the south, where it borders Yemen, the boats would instead have to divert around the African continent.
These two factors are relatively shorter-term, added Donovan, and the longer-term thinking begins with how the U.S. will bankroll yet another foreign conflict. Many economists and consumers have been growing steadily more concerned about the fiscal trajectory of the U.S., which is sitting on a national debt pile of more than $38.5 trillion.
Economists aren’t concerned about whether Uncle Sam will ever be able to reduce that number; rather, they’d like to see the U.S. government adding to it at a slower pace, courtesy of more balanced federal budgeting. Many have suggested the annual deficit could be shaved to 3% of GDP in a bid to slow the accumulation, but Donovan points out: “President Trump indicated attacks could go on for four or five weeks, and there are already reports of a need to urgently replenish weapons stockpiles. That potentially adds to the fiscal deficit.”
“It’s not likely to be a huge increase in the near term, but it may well be noticeable coming alongside the presumed rebate of illegal tariffs.”
The tariff complication
Indeed, the White House’s finances have taken a hit in recent weeks. The Supreme Court ruled late last month that the grounds under which President Trump had introduced a plethora of tariffs throughout 2025—including his ‘Liberation Day’ global update—were not legal. As a result, a portion of tariff revenues, estimated to be some $175 billion, will now be passed back to international trade courts for reimbursement to U.S. businesses.
Widely, the expectation is that this process will take years, with Treasury Secretary Scott Bessent saying the funds collected under the International Emergency Economic Powers Act (IEEPA) last year will be lost to the American people for good. Bessent has insisted that, despite this income being lost, the trajectory of U.S. duty revenue collection will not slow. Indeed, Trump has already imposed an immediate 10% levy on global trading partners.
However, additional spending on costly overseas military endeavours, coupled with a hit to the bottom line, will do little to reassure budget hawks who want to see the U.S. on a steadier fiscal footing. Speaking a week ago following the news of the IEEPA ruling, and prior to the Middle East action, Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said: “Ultimately, the president’s agenda thus far has added significantly to the national debt, and we will be spending even more because of our past refusal to pay for our priorities. Interest payments on the debt will total nearly $17 trillion between now and 2036; annual payments will rise from more than $1 trillion this year to more than $2 trillion by 2035.”
Returning to Donovan, the UBS economist added the Middle Eastern conflict will also hit growth in the region, for obvious reasons. He said: “For the Gulf region, although the peak tourism season has passed, there could be reputational damage arising from social media coverage. That might also have a bearing on decisions of the nomadic wealthy.”
