Donald Trump signed a memorandum of understanding with Iran at the Palace of Versailles, France, claiming the agreement would end economic chaos sparked by his bombing campaign in late February. "There is nothing as smart as the market – and the market loves it," Trump said, adding that without the deal, "the alternative would be a worldwide depression."
Oil Prices Drop but Peace Talks Falter
By the weekend, optimism waned after planned US-Iran peace talks in Switzerland were abruptly called off, then reinstated. Iran said Israeli bombing in Jordan justified closing the Strait of Hormuz again. Still, hopes persist that the sea passage carrying about 20% of the world's oil supplies will reopen fully in coming days. If oil flows more freely, it should forestall shortages of key products like jet fuel that analysts predicted if the war persisted.
Energy markets anticipated a resurgence in supply: the cost of a barrel of crude oil dropped below $80 after the agreement, the first time since early in the war.
Regional Economic Costs Vary
Governments are still counting the economic costs of a war they did not want. Gulf economies, hit by choked exports and Iranian bombs, are expected to plunge into recession. Analysts at Oxford Economics forecast GDP in the region to decline by 2.6% this year. In contrast, US economic growth remained strong, bolstered by AI investment and mega market launches like SpaceX. However, American drivers pay $1 a gallon more for petrol than a year ago, and US inflation surged to 4.2%, its highest in three years – news Trump greeted by claiming: "I love the inflation."
Federal Reserve Faces Pressure
Trump's pick as Federal Reserve chair, Kevin Warsh, was chosen in hopes of interest rate cuts. But Dario Perkins of TS Lombard said the Fed may increase rates up to four times (to 4.5%-5%) by end of next year due to strong economy and rising inflation. The US economy stayed strong as consumers ran down savings, while UK and European shoppers were more cautious. "The euro consumer, while they have savings, are more worried about the war and its outcome," Perkins said.
In the EU, heavily reliant on gas imports, the European Central Bank raised interest rates for the first time since 2023 to curb surging inflation. UK inflation hit 2.8% in April, with interest rates on hold, but confidence is hit hard and the jobs market remains weak. Sanjay Raja of Deutsche Bank said UK inflation could rise another percentage point in coming months. He expects the downward effect on growth to be modest – knocking up to a quarter of a percentage point off GDP.
Developing Countries Face Fuel Rationing
Many developing countries have been forced to ration fuel due to rocketing prices and brace for surging fertiliser costs. This "demand destruction" – cutting back usage when prices become unaffordable – may partly explain why oil prices haven't surged higher since February. Raja also noted that countries like China relied on strategic oil supplies, some unknown to analysts.
Deal Remains Fragile
Despite Trump's bullishness, the tentative agreement leaves many questions unanswered. Ryan Sweet of 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 through the rest of this year and potentially early next." Details on the Strait of Hormuz reopening remain hazy, with risks of tolls or reduced ship numbers.
Fears persist that hostilities could reignite if Trump doubts Tehran's nuclear plans. Neil Shearing of Capital Economics called the deal "a good start" but fragile, citing Israel's attacks on Hezbollah, Iran's chokehold over the strait, and nuclear disputes. He warned oil markets may be too sanguine: "Our modelling shows Brent crude should be about $90 a barrel in Q3 and $80 in Q4. But the market has raced ahead and is already pricing oil at $80."
Matt Gertken of BCA Research said the memorandum "should not be seen as a complete and durable peace deal" and assigned a 60% chance of renewed fighting after US midterm elections, as Trump may seek better terms from November 2026 to end of 2027.
Long-Term Supply Chain Risks
Even if the deal holds, economists warn energy markets may not snap back quickly. Gulf oil infrastructure needs restoration, and a backlog of ships must transit through the strait. More worrying, the conflict may permanently increase commodity costs by prompting firms to build more slack into supply chains. As Sweet put it: "I think there's going to be a long shadow from this."
