From Germany to Pakistan: How Hormuz tensions are hitting economies

The Middle East conflict has entered its fourth week and the ripple effects are beginning to show up across major economies. Concerns are growing that any further escalation could disrupt energy flows and add pressure to an already fragile global outlook. The strain is not falling evenly on every country.

Some nations are far more exposed than others, and have limited room to absorb the shock. Much of the attention is now centred on Iran’s role in the Strait of Hormuz, a critical route for global energy shipments.

Germany, with its manufacturing-heavy economy, is particularly sensitive to rising energy costs. Industrial activity has only recently stabilised after contracting since 2022.

As a major exporter, it also remains vulnerable to any slowdown in global demand. While a sizeable stimulus package announced last year offers some support, budget shortfalls in the coming years limit how much additional assistance can be provided, Reuters reported.

Italy’s exposure stems from both its strong manufacturing base and its energy mix, where oil and gas make up a relatively large share of primary consumption in Europe.

This leaves the economy more exposed to swings in global energy prices, especially during periods of supply uncertainty.

Britain depends more heavily on gas-fired power for electricity generation than many of its European peers, meaning gas prices have a strong influence on overall electricity costs. As gas prices are soaring more than oil, inflationary pressures remain elevated. While an energy price cap may ease the immediate impact, it could also contribute to higher interest rates, keeping borrowing costs among the highest in the G7 for longer, alongside rising unemployment. Limited fiscal space and pressure from bond markets further restrict policy options, Reuters reported.

Japan relies heavily on Middle Eastern oil, importing around 95% of its supply, with nearly 90% transported through the Strait of Hormuz. This dependence adds to inflationary pressures already stemming from a weak yen, which raises the cost of imported essentials such as food and raw materials across the economy.

India is also facing the threat, importing with about 90% of its crude oil and nearly half of its liquefied petroleum gas, with a large portion passing through the Strait of Hormuz. Growth forecasts have already been revised downward, while the rupee has slipped to record lows. The impact is also visible in daily life, with rising gas prices leading to informal rationing and the disappearance of items such as samosas, dosa and chai from menus in eateries.

Turkey, which shares a border with Iran, is dealing with both geopolitical uncertainty and the possibility of refugee inflows. On the economic side, pressure is mounting on the central bank, which has paused its interest rate-cutting cycle for the second time in a year and sold up to $23 billion in reserves to support the currency, signalling renewed strain on monetary stability.

Sri Lanka has moved to strict cost-control measures to manage energy pressures, including declaring Wednesdays a public holiday for state-sector workers. Schools, universities and public institutions have been shut, non-essential transport suspended, and a National Fuel Pass system introduced to regulate fuel access and limit consumption.

Pakistan, which narrowly avoided a crisis two years ago, has responded with higher petrol prices and temporary school closures. Government departments, according to Reuters, have seen fuel allowances reduced, restrictions placed on purchasing appliances and furniture, and instructions issued to reduce the use of official vehicles as part of broader austerity steps.

Egypt is under pressure from rising fuel and food costs, along with potential declines in Suez Canal and tourism revenues, the latter contributing nearly $20 billion last year. Servicing its debt, much of which is denominated in US dollars, has become more difficult, further compounded by a near 9% depreciation of its currency since the conflict began.