The economic impact of the conflict will be transmitted through various channels, notably energy, international trade, financial conditions, and uncertainty, the intensity and scope of which will depend on the duration of the conflict and the credibility of a potential ceasefire.
Some of the factors that could prolong the conflict include the ability of the Iranian leadership to maintain a status quo in the country and successfully resort to asymmetric warfare strategies, the ambiguity of the US and Israeli military objectives, the risk of a regional escalation, and the difficulty in achieving a ceasefire if maximalist conditions are imposed. Conversely, the US electoral calendar, the weakening of Iranian leadership, and damage to infrastructure increase the political and economic costs of prolonging the hostilities. In any case, it can be expected that, even under an early ceasefire, the medium-term scenario will remain marked by significant risks of renewed tensions.
Faced with a considerable range of known uncertainties (or known unknowns), such as the duration of the conflict or the extent of the damage to energy infrastructure, the market response during the first month of conflict could be explained by different layers of uncertainty. On the one hand, this could be a certain intuition (or an unknown known) that at least one of the parties will not be willing to engage in a prolonged conflict, given the rapidly rising economic costs of a disruption of this magnitude. By the end of March, with Brent futures trading at around 80 dollars one year ahead (up from 65 dollars in February) and natural gas futures at around 50 euros (versus 30 euros in February), the markets seem to be anticipating a relatively short-lived conflict, with limited structural damage and a stable ceasefire, along with a steady recovery of trade flows through Hormuz. On the other hand, the environment of elevated geopolitical risk and heightened market volatility points to a risk distribution with a heavy negative tail, skewed by an ample set of unknown unknowns.