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In their latest client note, analysts at Capital Economics assess the likely impact of a full-blown US-Iran geopolitical escalation on the global economy.

Key Quotes:

“The major concern for the world economy is that events spiral out of control and the US launches a full-blown military assault on Iran.

The resulting collapse in Iran’s economy could knock as much as 0.3%-pts off global GDP – equal to our estimate of the damage from the US-China trade war

Oil prices would surge. … This would push up inflation across the world – by as much as 3.5-4.0%-pts in the OECD countries … Central banks in the developed world would probably look through this. 

There would also be indirect effects via a hit to sentiment and possible disruption to shipping routes.

Equity and bond markets across the Middle East would probably come under pressure … we suspect that dollar pegs in the Gulf would remain intact.

At a global level, a dent to risk appetite would cause risky assets to suffer – equities would fall and EM currencies would weaken – and safe haven assets to rally.”