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The new normal is one of successive supply shocks as the global economy takes stock of the impact of the latest war in the Middle East. Mark Thirlwell GAICD unpacks the economic fallout and what this means for policymakers.
After the US launched Operation Epic Fury in February, the ensuing war in the Middle East triggered what the International Energy Agency (IEA) described as “the largest supply disruption in the history of the global oil market”. By mid-April, the IEA estimated the overall loss in oil exports to the world market exceeded 13 million barrels per day.
Adding the associated curtailments in oil production as regional storage facilities exhausted available capacity, plus the impact of war damage to local energy infrastructure, the IEA put cumulative supply losses at more than 360 million barrels in March this year and at a projected 440 million barrels for April.
The April IMF World Economic Outlook presented three different scenarios for the likely consequences for global growth and inflation. Under all three, growth fell and inflation rose. The most severe scenario projected world growth this year at two per cent, just above the IMF’s definition of a global recession. It also assumed the rate of world consumer price inflation would approach six per cent.
The third Gulf War is at least the fourth major adverse supply shock to have hit the world economy since 2020. First came the COVID-19 pandemic and its lockdowns, followed by the post-pandemic reopening shock with its wave of bottlenecks, shortages, shipping delays, port congestion and the so-called “Great Resignation”. Next up was the 2022 Russian invasion of Ukraine, which disrupted supplies of food, energy and fertiliser and triggered a jump in commodity prices and surging inflation.
Then there was “Liberation Day”, which in April 2025 delivered the biggest jump in US tariffs since the infamous 1930 Smoot-Hawley Tariff Act and triggered a sustained rise in trade policy uncertainty. Now there’s war in the Persian Gulf, closure of the Strait of Hormuz and another major energy (and potential food) shock.
Wait, there’s more
Other, smaller-scale disruptions to the supply side of the world economy also occurred over this time. That list includes: 
- Washington’s use of economic warfare, including financial sanctions and an oil price cap, to squeeze Moscow in response to the Ukraine invasion, and the deployment of trade and investment controls to limit China’s access to “sensitive” technologies as part of the Biden administration’s “small yard, high fence” strategy;
- Beijing’s weaponisation of critical minerals in retaliation for US tariffs;
- Drought-related disruptions to transit through the Panama Canal and Houthi attacks on ships transiting the Red Sea and the Bab El-Mandeb Strait in 2024.
Then there are the slower-moving and longer-running deteriorations in global supply capacity.
Consider, for example, the ongoing retreat from hyper-globalisation and the turn to reshoring and industry policy. Add in the accumulating effects of the global demographic transition, which is shrinking the relative size of working-age populations across the rich world and beyond. And in many advanced economies that were offsetting declining domestic fertility via higher migration rates, a populist backlash against large migration inflows now represents another constraint on labour supply.
Bumpy road ahead
Looking ahead, more adverse supply shocks seem likely.
The energy transition – probably given another push by the current crisis, albeit one complicated by a renewed focus on domestic coal as an energy security solution – faces multiple challenges from continuity of supply through to geo-economic manoeuvrings over renewable energy supply chains.
Climate change in the form of higher temperatures and more frequent extreme weather events poses risks to transport and logistics (low water levels are already disrupting European river transport, for example) and to crop production and food prices.
Rising geopolitical contestation threatens more policy-driven disruptions to cross-country supply chains. Finally, intensifying fiscal policy constraints arising from the combined effects of ageing populations, rising demand for increased defence spending and already high public sector debt burdens could limit governments’ ability to deliver more infrastructure funding.
We are living in a world where negative supply shocks have already become more common and where their frequency could further increase. That will have many important consequences, including adjustments to firm-level supply chain strategies and to investors’ portfolio allocation decisions. But two big consequences in particular stand out.
Firstly, life for policymakers will be harder than in a world where policy mainly had to respond to demand shocks. Then, price and output moved in the same direction and sent the same signal to policymakers. After an adverse demand shock (like the GFC), both economic activity and inflation come under downward pressure, signalling a need for policy loosening. With supply shocks, price and output move in opposite directions, sending conflicting signals. After a negative supply shock like the current jump in energy prices, for example, output will tend to fall even as prices go up, delivering a stagflationary impulse to the economy and threatening a nightmare for central bankers.
Secondly, policymakers will increasingly focus on bolstering national economic resilience to unreliable supply conditions. Globally, their tools will include stockpiling, hoarding and the creation of strategic reserves, from oil to fertiliser, potentially extending to crucial parts, components and other inputs, medicines and even food. There will be greater investment in the creation and/or retention of domestic capacity in key industries, possibly supplemented by higher trade and investment barriers to sustain operations.
Also, there will be more defence spending to support domestic capabilities (drone factories, for example), protect supply chains and guard critical infrastructure. All of these actions will put upward pressure on government spending and public debt, and downward pressure on productivity growth.
One final thought. The focus above is on adverse supply shocks. Today’s AI revolution brings with it the possibility of a major positive supply shock that could drive down prices while boosting activity, thereby providing an important offset to the forces set out earlier.
Even then, securing this future would still require overcoming familiar supply challenges (around power, water and land, for example). Not to mention the new challenges that even a positive AI shock will pose.
This article first appeared as 'Epic shock' in the June/July 2026 Issue of Company Director Magazine.
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