The impact of the US/Israel–Iran crisis on Asia

With a major earthquake, a tsunami will follow and then the full extent of the damage becomes clear. It’s the same with the Iran war. As transmission channels kick in, the energy crisis is morphing into a severe and persistent shock, especially in the Global South.

At the peak of the crisis, oil surged to $110–116 per barrel. But it remains volatile at $90–100 after a ceasefire pause. Liquefied natural gas (LNG) took an even harder hit. Oil prices surged more than 50% but LNG soared as much as 143% — a three-year high.

In Asia, supply risk is significant because 20% of global oil and major LNG flows via the Strait of Hormuz to the region. Here’s the difference between the two sources of the shock: LNG is the binding constraint; oil is volatile but more substitutable.

By 12 April, the region was overshadowed by LNG tightness, shipping frictions, foreign exchange pressure and already-locked second-quarter damage.

Compounding the challenges is that Prime Minister Benjamin Netanyahu’s military campaign in Lebanon severely strained the fragile US–Iran peace talks, which ended without a final deal on Sunday.

This will further downgrade economic prospects in Asia and the world at large.

Inflation, industrial slowdown, bottlenecks…

In energy crises, inflation has always been a dominant transmission channel. A shortage of fuel, electricity and fertilisers means that increased costs for businesses (higher wages, rising shipping costs, higher prices for raw materials) are passed on to consumers across a wide variety of goods and services.

The LNG shock tends to result in an industrial slowdown. As prices soar for petrochemicals, plastics and fertilisers, a major disruption has ensued in Asia, the “world factory”. In this regard, gas-reliant Japan, Korea and Vietnam are the most exposed.

In shipping and logistics, the Hormuz disruption means higher freight and insurance expenses, which have resulted in supply chain bottlenecks across Asia.

With foreign exchange and capital flows, oil importers have suffered currency depreciation. As central banks delay rate cuts, tight financial conditions ensue.

Nor is tourism immune to airfare spikes and Middle East airspace disruptions. For now, the impact is moderate but that could change if the crisis lingers.

Systemic shock

The Iran crisis is primarily an oil/LNG and supply chain shock. In East Asia, it is manifested as an industrial squeeze. In Southeast Asia, it is reflected by inflation and a foreign exchange squeeze.

Ceasefire relief does not mean normalisation. Due to uncertainty, a risk premium persists even if prices dip.

The status quo has deteriorated faster than consensus estimates suggest, as evidenced by the Philippines. Not so long ago, the Marcos Jr government still suggested that the stage was set for 5–6% growth. Now some multilateral institutions have downgraded the country’s GDP growth to 3.6–4.4%.

Across Asia, growth estimates are being recalibrated. Even the International Monetary Fund (IMF) signals a broad global downgrade and “permanent scarring”. This crisis is a systemic energy shock.

Why the revisions?

The LNG shock was underestimated. The foreign exchange and inflation feedback loop has proved more challenging than anticipated. Also, the inventory illusion is fading. Finally, March data still reflected pre-shock inventories but demand compression will ensue in April–May.

Downgrades after downgrades

In Japan and South Korea, the status quo is worse than earlier assumed due to vulnerability to LNG, petrochemicals and exports.

In Japan, inflation and a weak yen have adverse implications. The central bank is reassessing the rate trajectory. South Korea’s GDP growth is likely closer to 1% or below, not 1.5–2%.

As a trade, shipping and refining hub, Singapore remains highly sensitive to freight costs and energy flows. It is facing a large downgrade in percentage terms.

Ever since the first Trump administration, China has been buffered by multiple US-led penalties. But it benefits from Russian energy and diverse policy tools. Though resilient, Beijing must cope with weakening export and industrial demand.

Vietnam is trying to manage its rising supply chain exposure, particularly manufacturing input costs (plastics, chemicals). With a lagged effect, the damage is accelerating.

With its very high oil dependence and scarce reserves, the Philippines is already facing an energy emergency, a currency shock and transport disruptions — amid the greatest corruption debacle and political polarisation in decades.

Risk trajectory if war persists

So, what if the ceasefire fails and the war persists another month?

Oil prices would rebound towards $105–120 as the risk premium returns. If the crisis intensifies, they would surge to the $150 level.

LNG prices would stay elevated and spike further with tight supply. Inflation would surge with a lag in the second and third quarters.

Foreign exchange would suffer further depreciation, especially in Korea (KRW), the Philippines (PHP) and Indonesia (IDR). At the same time, supply chains would crumble further with inventories depleted.

Key escalation triggers include a renewed Hormuz disruption, Qatar LNG outages and crisis expansion to Bab el-Mandeb, which would serve as a trade shock multiplier.

According to the IMF, the Iran shock is already affecting 80% of countries. In developing Asia, the crisis could shave off 1.3 percentage points from GDP growth.

Persistent supply shock

For now, the energy shock remains the largest on record. Downside risks dominate. Growth distributions continue to shift lower. And there are no meaningful upgrades.

As the regional stabiliser, China’s growth hovers around 4.0%, but it is being challenged by weakening exports and softer global demand. Korea and Japan are deteriorating further.

In Southeast Asia, Singapore is taking a hard hit. Malaysia and Indonesia are somewhat buffered. Southeast Asia’s importers are now in a 3–4% growth zone. The Philippines is already in an emergency.

What the region must cope with now is a persistent supply shock with partial financial relief. Although markets can bounce, the real economy will not rebound in parallel. Global growth prospects are shifting lower to 2.0–2.4%.

What happens in Asia will not stay in Asia — neither Europe nor North America is immune to the impending tsunami

Dr Dan Steinbock, an expert of the multipolar world, is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). He is also the author of two new books on the Middle East crises: The Obliteration Doctrine (September 2025) and The Fall of Israel (Oct. 2024).

For more, see https://www.differencegroup.net/