President Donald Trump signed a memorandum of understanding with Iran at the Palace of Versailles this week, hailing the agreement as a success and urging skeptics to take Wall Street’s word for it. “There is nothing as smart as the market – and the market loves it,” Trump said, claiming credit for ending the economic chaos set off when the United States began bombing Iran in late February. Without the agreement, he said, “the alternative would be a worldwide depression.”
But economists said the tentative deal leaves many questions unanswered and will not quickly erase the economic damage from the conflict. The planned U.S.-Iran peace talks in Switzerland were abruptly called off and then reinstated, and Iran said Israeli bombing in Jordan justified its renewed closure of the Strait of Hormuz, a passage that carries about 20% of the world’s oil supplies. Hopes persist that the strait will reopen fully in the coming days and weeks, according to analysts.
If oil begins to flow more freely, it could forestall shortages of key products such as jet fuel that some analysts had predicted if the war continued. Energy markets are already pricing in a resurgence in supply: the cost of a barrel of crude oil dropped below $80 after the agreement was announced, for the first time since the early weeks of the war. But the oil markets may be too sanguine, said Neil Shearing, chief global economist at Capital Economics. “Our modelling of the oil price shows that prices of Brent crude should be about $90 a barrel in the third quarter and $80 a barrel in the fourth quarter. However, the market has raced ahead and is already pricing oil at $80,” he said.
Government budgets are still absorbing the costs of the war, according to economists interviewed by The Guardian. The severity of the impact varies by region. Gulf economies, which have seen exports choked off and which faced Iranian bombardment, are expected to plunge into recession. Analysts at Oxford Economics forecast GDP in the region to decline by 2.6% this year.
In the United States, now a net energy exporter, economic growth has remained strong, and stock markets have been bolstered by the AI investment boom. But American drivers are paying $1 a gallon more for gasoline than a year ago, and economy-wide inflation in the United States surged to 4.2% in May, its highest rate in three years, according to the Labor Department. Trump greeted the inflation news by saying, “I love the inflation.”
Trump’s newly appointed pick as Federal Reserve chair, Kevin Warsh, was selected in the hope that he would deliver a string of interest rate cuts. Instead, Warsh is likely to face pressure to raise borrowing costs in the coming months, economists said. Dario Perkins, head of global research at TS Lombard, said of the leading central banks, “as the economy has remained strong and inflation has increased, the Fed is probably going to increase rates the most, maybe as much as four times (to a range of 4.5% to 5%) by the end of next year.”
Perkins said the U.S. economy had remained strong in part because consumers are running down their savings to continue spending, while shoppers in the United Kingdom and continental Europe have been more cautious. “The euro consumer, while they have savings, are more worried about the war and its outcome,” he said.
In the European Union, which relies heavily on gas imports, the European Central Bank has already raised interest rates for the first time since 2023, aiming to curb surging inflation. The impact on prices in the United Kingdom has been somewhat more muted — inflation hit 2.8% in April, and interest rates are on hold for now — but confidence has been hit hard and the jobs market remains weak. Sanjay Raja, chief U.K. economist at Deutsche Bank, said inflation would rise further, perhaps by up to another percentage point, in the coming months. “All of the data suggests that there’s something coming – we are going to see some pressure,” Raja said. He expects the downward effect on growth to be relatively modest, knocking up to a quarter of a percentage point off GDP growth.
Many developing countries have been forced to ration fuel in the face of rocketing prices and are bracing for the impact of surging fertilizer costs in the coming months. This “demand destruction” — cutting back on usage when prices become unaffordable — may be part of the reason oil prices have not surged even higher since February, economists said. Raja argued it is also because countries including China have been able to rely on strategic oil supplies, some of which may not have been known to analysts.
Despite Trump’s bullishness, the tentative agreement leaves many economic effects unresolved. Ryan Sweet, chief global economist at Oxford Economics, said: “The difficulty of quantifying the economic cost is that the economic timeline doesn’t equal the military timeline, so we’re still going to be feeling the economic impact of this through the rest of this year and potentially early next.” Sweet pointed out that while Trump stressed the Strait of Hormuz would reopen, the details remain hazy. “There’s still the risk that tolls are imposed on ships, or the number of ships that go through the strait is a lot less than before the conflict – there’s still a lot of uncertainty around that,” he said.
Fears remain that hostilities could be reignited, for example if Trump comes to doubt that Tehran is serious about winding down its nuclear program. Shearing of Capital Economics said policymakers should view the agreement as fragile. “It’s a good start. But there are several ways the deal can fall apart. Israel’s attacks on Hezbollah and Lebanon, Iran exploiting its chokehold over the strait of Hormuz, and a dispute over how to limit Iran’s nuclear ambitions,” he said.
Matt Gertken, chief geopolitical strategist at BCA Research, said in a research note that the memorandum of understanding “should not be seen as a complete and durable peace deal that uncorks the global commodity bottleneck and concludes the war.” Instead, he said, “we would still assign a 60% chance of renewed fighting after the midterm [elections in the United States] as President Trump gains a window, from 4 November 2026 until the end of 2027, to try to get better terms and better implementation.”
Even if the deal holds, economists are wary of assuming energy markets will snap back to normal quickly. It will take time for Gulf oil infrastructure to be restored and for the backlog of ships stuck in the region to transit through the strait. There is also a risk that the conflict has permanently increased the cost of some commodities by prompting firms to build more slack into their supply chains. As Sweet put it, “I think there’s going to be a long shadow from this.”