Economic implications of war: Middle East war and the automotive industry

If the conflict continues for four months to a year, recovery in 2026 becomes less likely and the economic impacts of war may spread.

If the war extends up to a year, we expect regional GDP pressures to extend beyond 2026. Shipping premiums would become persistent, and use of the Strait of Hormuz would remain high risk due to the ongoing war impact on global shipping patterns. If the war extends through 2026 and into 2027, there is also risk for capital investment in Iran and the Middle East to be paused, delayed or canceled.

Globally, this midterm duration may increase the risk that banks will not only pause or delay rate cuts, but also potentially increase rates, depending on market conditions, amplifying the economic impact of the war. Global inflation pressure will likely increase as higher shipping and commodity costs filter through to consumer products and household costs, and global shipping costs will likely increase as companies increasingly shift to more costly alternative routes to avoid Hormuz.

The effects of war on oil and natural gas prices would remain elevated because of ongoing shipping risks as well a potential supply constraints, and price levels would also depend on sourcing patterns for individual markets. In the Middle East, a midterm conflict length also would create challenges for bulk good logistics. Globally, oil and natural gas supply disruptions may impact Asia and Europe.

Vehicle production impact could expand under longer term war

Vehicle production impacts in the Middle East would extend beyond Iran as Middle East war supply disruptions spread. Iranian vehicle production would remain offline. Supply chain disruptions would begin to affect production in Turkey earlier than in other areas.

Globally, production impacts are likely to stem from supply and shipping disruptions. Production cost inflation would become more entrenched. Cost pressures would affect the profitability of entry-level ICE vehicles, potentially leading automakers to prioritize limited supply toward higher-margin products, similar to patterns seen during the semiconductor crisis.

However, vehicle affordability remains important to consumers, and they may become more price sensitive if the war continues. In either case, automakers will be looking to balance increased costs, customer willingness to pay and profitability level across all markets they participate in.

If the war extends up to a year, vehicle demand disruption in the Gulf region would deepen, and a full rebound would likely take longer, not beginning until the conflict is resolved. Globally, vehicle demand will likely be impacted as higher fuel costs increase household transportation costs and inflation increases other household expenses. If higher interest rates also occur, new vehicle sales would be impacted.

If the war persists beyond one year, the economic impact of war will continue to weigh on market activity, commodities and vehicle pricing. Elevated costs would reach a new set point, and sharp movements may occur less frequently.

Iran and the Gulf region would see a stabilization in the rate of price increases, though costs will likely remain elevated. The region would see reductions in imports and outflows, consumer activity and investment. Globally, consumers may integrate higher inflation into their expectations rather than anticipating a return to prewar pricing levels. With entrenched global inflation, higher interest rates are also expected to be prevalent. Alternative shipping solutions would become entrenched.

Oil and gas prices likely to stay high

On the commodities side in the region, oil price increases will likely remain sticky, while logistics shifts for oil and other commodities in the Gulf will likely become semi-permanent. Globally, oil and natural gas price increases will likely become sustained, and non-OPEC sources would emerge as alternatives.

Cost increases would now more permanently reflect risk premiums as well as higher shipping costs. We also expect energy-intensive commodities to have higher embedded refinement costs.

A war lasting longer than one year would see Iranian vehicle production still halted and dependent on reliable parts supply. Moving past the year mark—and depending on the breadth of the war—production disruptions at other facilities in the Middle East would increase. Globally, intermittent supply disruptions would also occur.

One impact may be Turkey’s production of light commercial vehicles, which would have an outsized effect on the European market. Shipping pattern changes would also lead to long-term sourcing changes for both the light vehicle and medium- and heavy-duty sectors.

Vehicle demand disruption in Iran and the Middle East would also deepen. Global implications for vehicle demand would see changes in overall volume, but also propulsion system choice and segment size, depending on the market. Sustained fuel cost increases could spur EV demand, as consumers may perceive better total cost of ownership tradeoffs.

If the war extends another year, economic, commodity, and vehicle price and demand impacts would be a headwind, although shipping changes could provide a tailwind for medium- and heavy-duty vehicle demand.