Middle East Supply Disruption to Reduce Global GDP by ~0.4–0.5%, Impact Contained

Overview

This report quantifies the potential impact on global economic growth if, three months after the outbreak of war in Iran, the Strait of Hormuz remains closed indefinitely—resulting in a permanent loss of Middle Eastern goods supply. Although current global growth remains resilient, markets fear that accumulated supply shortages could significantly dampen economic activity. Goldman Sachs constructs an adjustment-mechanism model incorporating price-induced demand destruction, resource reallocation, and input substitution. It concludes that while shocks could be severe under extreme assumptions, realistic adjustment mechanisms imply that the direct drag on global GDP from non-oil supply disruption would be only ~0.4–0.5%, rendering the overall impact moderate and manageable.

Core views

Demand-side and price mechanism: Goldman Sachs continues to expect that most of the demand destruction required to clear markets will be price-driven. Since the onset of conflict, prices for highly exposed products have surged sharply—crude oil prices have risen up to 50%, refined products (gasoline, jet fuel, diesel) have posted even larger gains, basic chemical prices have increased by over 60%, and helium spot prices have doubled. For oil, despite rapid inventory drawdowns, OECD commercial oil stocks remain above pre-shale levels—making it plausible that steep price increases will suppress demand sufficiently to avoid total supply exhaustion. The baseline forecast implicitly assumes energy price spikes will reduce global GDP by 0.5 percentage points. Quantity-based perspective and extreme risk: From a quantity-loss perspective—not price—the Middle East’s non-oil goods supply accounts for 1.3% of global GDP. Under an extreme ‘Leontief production function’ assumption—where each input is essential and perfectly non-substitutable—a 10% loss of any input would reduce output by 10%. In this scenario, global GDP could suffer losses as high as 27%, with cascading effects along supply chains. This extreme case highlights the potentially destructive power of supply bottlenecks—particularly for regionally concentrated, low-substitutability goods such as diesel and petrochemical feedstocks. Adjustment mechanisms and real-world impact: The report identifies three key adjustment mechanisms that meaningfully mitigate the shock. First, excluding non-critical inputs—defined as those accounting for less than 0.01% of total output value—reduces the GDP impact from 27% to 10%. Second, high prices drive resource reallocation toward higher-value uses (e.g., diverting helium from party balloons to semiconductor manufacturing); under domestic reallocation, the impact falls further to 0.4%. Third, some substitution elasticity exists among intermediate inputs (e.g., paper packaging replacing plastic), and introducing modest substitutability further lowers the impact. Combining these reasonable assumptions, Goldman Sachs estimates that a complete loss of Middle Eastern non-oil goods supply would directly reduce global GDP by 0.4–0.5%, with Turkey (−2.2%) and India (−1.1%) most severely affected, while advanced economies like the U.S. face minimal impact (<0.1%). Inflation implications: Although directly affected commodities face significant upside price pressure, adjustment mechanisms preserve relative continuity in downstream production—avoiding extreme price surges. The model indicates that shortages of chemicals and refined products would add ~0.4 percentage points to core inflation; combined with energy price effects, headline inflation is projected to rise by 1.0 percentage points and core inflation by 0.3 percentage points. Energy prices remain the dominant inflation driver.

Analysis framework

Goldman Sachs employs a hybrid methodology combining ‘price-driven demand destruction’ with ‘quantity-based input-output analysis’. First, traditional growth rules-of-thumb are used to assess how energy price increases affect GDP. Second, to capture regional shortage risks for non-oil goods, the firm applies the Exiobase input-output database to simulate a full loss of Middle Eastern supply. The analysis begins with an extreme ‘bottleneck model’ (Leontief production function, assuming zero substitution and zero reallocation) to derive maximum theoretical losses. It then progressively incorporates more realistic ‘adjustment margins’: (1) applying a bottleneck threshold to exclude non-critical inputs; (2) simulating optimal inter-industry resource reallocation; and (3) introducing a Constant Elasticity of Substitution (CES) production function to reflect feasible input substitution. This stepwise refinement—from extreme to realistic—quantifies the mitigating effect of each adjustment mechanism on GDP loss.

Methodology notes

• Industry/sector analysis framework

  Input-output linkages and supply chain transmission

  Using input-output tables (IO Tables) to trace how the loss of a specific commodity propagates through upstream and downstream industries, thereby quantifying its indirect impact on aggregate output.

• Industry/sector analysis framework

  Leontief Production Function

  An extreme production model assuming perfect complementarity among inputs—i.e., no substitution is possible—so any shortage of a critical input proportionally constrains final output. Often used to assess worst-case supply chain bottlenecks.

• Industry/sector analysis framework

  Constant Elasticity of Substitution (CES) Production Function

  A production model allowing partial substitutability among inputs, making it more realistic than the Leontief model, and used to assess firms’ ability to switch to alternative inputs amid shortages.

• Macroeconomic framework

  Price-driven demand destruction

  Using sharp market price increases to suppress consumption demand, thereby restoring market equilibrium between constrained supply and reduced demand—and avoiding physical supply exhaustion.

Key data

• Change in Strait of Hormuz traffic volumeDecline of over 90%Relative to normal levels
• Crude oil price increaseUp to 50%Since the start of the conflict
• Basic chemical price increaseOver 60%As of April, the fastest on record
• Global GDP loss under extreme bottleneck model27%Assuming all inputs are critical and non-substitutable
• Direct global GDP loss after adjustments0.4–0.5%Direct drag from non-oil supply disruption
• Estimated GDP loss for Turkey-2.2%Significantly impacted by non-oil supply disruption
• Estimated GDP loss for India-1.1%Significantly impacted by non-oil supply disruption
• Additional upward pressure on core inflation0.4 percentage pointsDriven by shortages of chemicals and refined products

Impact & implications

The report argues that although Middle East supply disruptions have raised market concerns about cascading effects akin to the 2021–2022 semiconductor shortage, real-world adjustment capacity—including cutting non-critical consumption, reallocating resources to higher-value sectors, and sourcing substitutes—will meaningfully buffer the shock. This implies that while global growth faces headwinds, a catastrophic collapse is unlikely. For policymakers and investors, attention should shift from ‘Will full supply exhaustion occur?’ to ‘Which low-value-added industries and low-income countries will bear the brunt of the pain?’, and to the persistence of energy prices as the dominant inflation driver. Economies with low Middle East exposure and strong purchasing power—such as the U.S.—will remain relatively insulated.

Risks

• If supply constraints persist significantly longer than expected, growth impacts may exceed the baseline forecast
• Potential supply chain bottlenecks could trigger disproportionately large price increases for downstream goods
• Reduced non-energy supply in H2 2026 may pose additional challenges to Asian growth

What to watch

• Supplier delivery times in corporate surveys—as an early signal of supply chain stress
• Industrial production data—to gauge whether supply shocks are propagating through the supply chain
• Emerging rumors of new output reductions upstream in the value chain
• Price trajectories of constrained products—if prices surge again, it may signal renewed scarcity concerns