Trump Celebrates Iran Deal as Oil Prices Drop
Donald Trump signed a memorandum of understanding at the Palace of Versailles, France, hailing the Iran deal as a market success. 'There is nothing as smart as the market – and the market loves it,' he said, claiming credit for ending economic chaos that began when he started bombing Iran in late February. Without the agreement, he warned, 'the alternative would be a worldwide depression.'
Crude oil prices fell below $80 a barrel after the announcement, the first time since the war's early days. However, the outlook soured over the weekend when planned US-Iran peace talks in Switzerland were abruptly called off, then reinstated, and Iran said Israeli bombing in Jordan justified closing the Strait of Hormuz again. Hopes persist that the sea passage, carrying about 20% of the world's oil supplies, will reopen fully soon.
Economic Costs Vary by Region
Gulf economies, hit by choked exports and Iranian bombs, are expected to plunge into recession. Analysts at Oxford Economics forecast GDP in the region to decline by 2.6% this year. In contrast, US economic growth remains strong, bolstered by an AI investment boom and mega market launches like SpaceX. However, American drivers pay $1 a gallon more for petrol than a year ago, and US inflation surged to 4.2%, its highest in three years – news Trump greeted by claiming, 'I love the inflation.'
Trump's newly appointed Federal Reserve chair, Kevin Warsh, was chosen to deliver interest rate cuts but now faces pressure to raise borrowing costs. Dario Perkins, head of global research at TS Lombard, said the Fed may increase rates up to four times, to a range of 4.5% to 5%, by end of next year. He noted US consumers have run down savings to spend, while European shoppers are more cautious.
EU and UK Face Inflation and Weak Confidence
The European Central Bank has raised interest rates for the first time since 2023 to combat surging inflation. In the UK, inflation hit 2.8% in April, with interest rates on hold but confidence hit hard and the jobs market weak. Sanjay Raja, chief UK economist at Deutsche Bank, said inflation could rise another percentage point in coming months, though the downward effect on growth may be modest – knocking up to a quarter of a percentage point off GDP.
Many developing countries have rationed fuel due to rocketing prices and face surging fertiliser costs. This 'demand destruction' may partly explain why oil prices have not surged higher since February. Raja also argues that countries like China have relied on strategic oil supplies unknown to analysts.
Uncertainty Remains Despite Trump's Bullishness
Trump's tentative agreement with Iran leaves many questions unanswered. Ryan Sweet, chief global economist at Oxford Economics, said, 'The difficulty of quantifying the economic cost is that the economic timeline doesn't equal the military timeline, so we're still going to be feeling the economic impact of this through the rest of this year and potentially early next.' He noted details on reopening the Strait of Hormuz remain hazy, with risks of tolls or reduced ship traffic.
Fears persist that hostilities could reignite if Trump doubts Iran's commitment to winding down nuclear plans. Neil Shearing, chief global economist at Capital Economics, said, 'It's a good start. But there are several ways the deal can fall apart,' citing Israel's attacks, Iran's chokehold, and nuclear disputes. He added oil markets may be too sanguine, with Brent crude prices expected at $90 a barrel in Q3 and $80 in Q4, but markets already pricing oil at $80.
Matt Gertken, chief geopolitical strategist at BCA Research, said the US-Iran memorandum 'should not be seen as a complete and durable peace deal that uncorks the global commodity bottleneck.' He assigned a 60% chance of renewed fighting after US midterm elections, as Trump gains a window from November 2026 to end of 2027 to seek better terms.
Long-Term Economic Shadow
Even if the deal holds, economists warn energy markets may not snap back quickly. It will take time to restore Gulf oil infrastructure and clear the backlog of ships. More worrying, the conflict may permanently increase commodity costs by prompting firms to build more slack into supply chains. As Sweet put it, 'I think there's going to be a long shadow from this.'
