Middle East Supply Disruption Causes Approx. 0.4-0.5% Loss in Global GDP; Non-Oil Shortage Risks Exceed Oil

Overview

This research report, published by Goldman Sachs' global economics team, aims to quantify the potential impact on global economic growth three months after the outbreak of the Iran war, resulting from the continued blockade of the Strait of Hormuz and long-term interruptions of Middle Eastern commodity supplies. The core conclusion is: while commodity prices have soared, the global economy possesses multiple adjustment mechanisms, making actual GDP losses much milder than predicted by extreme theoretical models. The report estimates that, accounting for various economic adjustments, the complete loss of Middle East non-oil commodity supplies will directly drag down global GDP by approximately 0.4-0.5%, with the shock concentrated mainly in Asian emerging markets, leaving developed economies relatively immune.

Core views

Price mechanisms remain the primary force for clearing markets, especially in the oil sector. Since the outbreak of the conflict, crude oil prices have risen as high as 50%, with refined product increases even larger. Basic chemical prices rose over 60% from February 27 to April, and helium spot prices doubled. However, OECD commercial crude oil inventories currently remain above the pre-shale revolution average level, indicating that inventory buffers still exist. Therefore, the report maintains its standard rule-of-thumb judgment that the current energy prices imply a GDP drag of approximately 0.5 percentage points; absent further tightening of supply constraints, a severe economic recession caused by physical disconnections is unlikely. Risks of non-oil commodity disconnections are actually higher than for oil, as these markets are more regionalized and less globalized. Middle East non-oil exports account for only 1.3% of global GDP, but under extreme "bottleneck model" (Leontief production function) assumptions where the absence of any single critical input leads to a proportional drop in downstream output, global GDP could theoretically plummet by 27%. However, this extreme scenario ignores the resilience of the real economy. The report points out that the true risk points for shortages lie in petrochemical feedstocks such as naphtha, diesel, and jet fuel, with some Asian chemical plants having declared force majeure, suggesting supply interruptions may persist into 2027. Economies possess three key adjustment mechanisms that can transform theoretically catastrophic shocks into manageable losses. First is "scrapping minor inputs": in reality, many intermediate goods are either not essential or represent a negligible share; setting a conservative bottleneck threshold of 0.01% reduces the theoretical GDP loss from 27% to 10%. Second is "resource reallocation": high prices guide scarce resources to high-value-added sectors, for example, shifting helium usage from party balloons to semiconductor manufacturing; domestic reallocation can compress GDP losses from 10% down to 0.4%. Third is "factor substitution": companies can respond to plastic shortages by switching packaging materials; introducing moderate substitution elasticity further reduces global growth losses to below 5%. Synthesizing these adjustment mechanisms, the report provides a more realistic baseline estimate: complete loss of Middle East non-oil commodity supplies will directly drag down global GDP by 0.4-0.5%. This shock exhibits significant regional asymmetry, with Turkey (-2.2%) and India (-1.1%) suffering the most, while developed economies like the U.S. and Norway suffer losses not exceeding 0.1% due to low dependency and strong purchasing power. Regarding inflation, besides energy prices pushing up core inflation by 0.3 percentage points, additional upward pressure from shortages in chemicals and refined products is only 0.4 percentage points, confirming that energy prices remain the main driver of inflation.

Analysis framework

The report employs a dual-track analytical framework combining "price channels" and "quantity channels." For highly globalized commodities like oil, it follows Goldman Sachs' standard "price-growth rule of thumb," deriving demand destruction and GDP drag from the magnitude of energy price changes, focusing on the effectiveness of market clearing mechanisms. For regional markets like non-oil commodities, it constructs a "quantity-based" analytical framework based on Exiobase input-output tables to simulate the direct and indirect transmission effects of supply losses. In quantity analysis, the institution did not stop at simple linear extrapolation but introduced three progressive correction dimensions to approach reality: first, setting a "bottleneck threshold" to exclude non-critical inputs that play a trivial role in production, avoiding excessive amplification of tail risks; second, constructing a "resource reallocation model" distinguishing between no reallocation, domestic reallocation, and global reallocation scenarios to quantify the role of price signals in optimizing resource allocation; third, calibrating "Constant Elasticity of Substitution (CES) production functions" to incorporate the possibility of factor substitution at the micro level into macro calculations. This layered stripping method from "theoretical extremes" to "realistic baselines" is the key logical chain explaining why the report concludes that the "impact is manageable."

Methodology notes

• Industry/Industrial Analysis Framework

  Input-Output Tables (IO Tables) and Supply Chain Transmission Analysis

  Utilizes input-output tables like Exiobase to track supply-demand interrelationships among 200 products across 163 industries. It not only calculates direct supply losses but also quantifies their indirect chain reactions on downstream industries, serving as a quantitative tool for assessing supply chain breakage risks.

• Industry/Industrial Analysis Framework

  Leontief Production Function (Bottleneck Model)

  An extreme technological assumption in production arguing that all inputs are indispensable and cannot be substituted; a reduction of x% in any input leads to a reduction of x% in output. The report uses this as an upper-bound benchmark for stress testing, then revises it to realistic scenarios by introducing substitution elasticity and resource reallocation.

• Industry/Industrial Analysis Framework

  Constant Elasticity of Substitution (CES) Production Function

  Unlike the Leontief model, the CES function allows for a certain degree of mutual substitutability among different inputs. By calibrating substitution elasticity parameters (e.g., 0.1), the report more realistically reflects enterprises' ability to switch raw materials or processes when facing supply shortages, thereby smoothing extreme shocks.

• Macroeconomic framework

  Price-Growth Rules of Thumb

  A simplified model used by Goldman Sachs to quickly estimate the impact of energy price shocks on GDP. Based on historical data regression, this rule directly maps the magnitude of oil/gas price changes to economic growth drag, suitable for globally traded commodities like oil that are primarily cleared through price mechanisms.

Key data

• Throughput Reduction in the Strait of Hormuz>90%Declined by more than 90% compared to normal levels; conflict has persisted for three months
• Increase in Crude Oil PricesUp to 50%Cumulative increase since the outbreak of the conflict
• Increase in Basic Chemical Prices>60%Increase recorded between February 27 and April, marking a record-fast pace
• GDP Drag from Energy Prices (Baseline)0.5ppDrag implied by current growth forecasts and baseline commodity projections
• Direct GDP Drag from Non-Oil Disruptions0.4-0.5%Baseline estimate after accounting for bottleneck thresholds, resource reallocation, and substitution elasticity
• Turkey GDP Loss (Non-Oil Disruption)-2.2%One of the countries most impacted by non-oil supply interruptions
• India GDP Loss (Non-Oil Disruption)-1.1%Emerging market significantly impacted by non-oil supply interruptions
• U.S. GDP Loss (Non-Oil Disruption)≤0.1%Minimally affected due to low dependency and strong purchasing power
• Additional Pressure on Core Inflation from Chemical Product Shortages0.4ppIncremental upward pressure叠加 (added on top of) energy price impacts

Impact & implications

The report argues that the impact of Middle East supply disruptions on the global economy will be "mild yet bounded" rather than a systemic collapse. For investors, this means不应过度交易 (should not excessively trade) the "global depression" narrative, but instead focus on structural differentiation: growth resilience and inflation pressures in Asian emerging markets (especially India, Turkey, and South Korea) will be significantly higher than in Europe and the U.S. Meanwhile, since downstream production remains largely intact, commodity prices outside of energy are unlikely to surge uncontrollably; the main drivers of core inflation will remain anchored in energy. However, the report also warns that if output reductions begin to appear in high value-added industries or prices jump sharply again, these could be signals that adjustment mechanisms are failing and risks are escalating.

Risks

• Supply constraint duration far exceeds expectations, exhausting adjustment mechanisms
• Reduction in non-energy supplies poses additional challenges to Asian growth in H2 2026
• Potential supply chain bottleneck points may trigger disproportionate spikes in downstream commodity prices
• Breakdown of geopolitical negotiations leading to prolonged closure of the Strait of Hormuz

What to watch

• Manufacturing supplier delivery time PMI index (especially Eurozone and high-frequency data)
• Whether the New York Fed Global Supply Chain Pressure Index remains persistently elevated
• Rumors of production cuts in high value-added industries (currently, cuts are concentrated in low value-added sectors)
• Whether national industrial production data indicates supply shocks spreading upstream in the supply chain
• Commodity price trends; if prices surge significantly again, it may indicate renewed concerns about shortages