The Iran crisis is a shock to the global financial system – and it comes at a troubling time

We only learn the weaknesses of a system when it is under stress, and here is a new and unexpected stress

What damage does the killing of Iranian general Qassem Soleimani do to the world economy?

If that seems a mercenary reaction to a huge geopolitical event, it is. But the regional outcomes will take months, even years, to play out, while investors and companies have meanwhile to make swift decisions on what to do about it. There is already the immediate reaction of a rise in the price of oil and gold, and the fall in what are seen as risky assets. But beyond this, what?

Start with oil. Iran will need carry on producing and selling the stuff because it needs the revenues. US-led sanctions have little effect on that aspect of the Iranian economy as there are plenty of buyers in the rest of the world. It is not of itself a huge economy – its GDP is somewhere between that of Sweden and Norway – but the whole of the Middle East pulled together is. What Iran decides to do in retaliation does have an important knock-on impact on its neighbours.

The obvious question is whether Iran will seek to curb Saudi Arabian production, and we have the precedent of the attacks on Aramco facilities last autumn, which the US blamed on Iran. It could in theory at least try to block the Straits of Hormuz, which would be very serious indeed given that more than one-third of the world’s seaborne oil exports pass through it. But the Saudis showed that they could quickly recover, and trying to block the Straits would be an attack on the world rather than the US. The US, remember, is now the world’s largest oil producer and in the first instance (though not in the longer term) could even benefit from disruption in alternative supplies.

However, a sharp rise in the price of oil, were that to occur, would undoubtedly disrupt the world economy. Europe and Japan would be particularly hard hit. The impact on the UK would be more marginal, for though it has been a net importer of oil since 2005, there are forecasts that show it may soon become a net exporter again as new fields come on stream.

But it would be wrong just to focus on oil. Even rumbling hostilities damage the Middle East as a whole. Obviously the level of damage will depend on how the next stage of the conflict, if any, develops, but it would be reasonable to expect all countries to suffer some loss of economic activity. Most immediately, fewer western tourists are likely to visit Iran itself, which is sad because those of us who have been there know what an extraordinary ancient civilisation it is. If concerns over safety spread to the Gulf states, as they may, then the entire region will take a grave hit. Dubai, the most important transport and service industry hub in the Middle East, looks seriously vulnerable.

Might the combination of a sharp rise in the oil price and recession in the Middle East trigger a global recession?

The answer does of course depend on how present tensions develop. We certainly have to acknowledge the possibility that this may be the trigger for the next downturn, but something else would have to happen. We are due some sort of slowdown and it may already be happening. But if you look at triggers for previous downturns, only the two oil shocks of the 1970s really figure, when oil was more important to the world economy than it is now. They were not caused by conflict in the Middle East – they were caused by The Organisation of the Petroleum Exporting Countries (Opec) restricting supplies. The two Gulf wars did not of themselves lead to a global recessions.

There are, however, risks. We only learn the weaknesses of a system when it is under stress, and here is a new and unexpected stress. One risk is that there will be a rise in inflation and global bond yields. Another is that some banks are more exposed to conflict in the Middle East than is appreciated. A more general concern is that this tips a slowing European economy from very modest growth into a regional (but not global) recession.

Or it may simply be that investors worldwide decide that this conflict is a signal that the long boom is coming to an end, stop investing in what they see as risky projects, and that falling investment flows then do trigger the end of the boom.

The key point here is that this is a shock. It is a shock at many different levels. And it is a shock that comes at a particularly troubling time.