The past month has been dominated by the escalation of tensions between the US and Iran and the risk of an outright conflict is rising. Admittedly, President Trump decided to call off airstrikes on Iran in response to the downing of a US drone by Iranian forces. And, despite his strong rhetoric, Mr. Trump appears to prefer getting Iran back around the negotiating table rather than resorting to force. This is perhaps one reason why the reaction in local financial markets and the oil market to recent events has, so far, been fairly limited. But it wouldn’t take much to spark military conflict. The First Gulf War provides a useful indicator of the possible economic fallout. Kuwait, which was invaded by Iraq, saw its economy contract by 50%. But the other Gulf countries, which experienced little fighting in their territory, actually recorded stronger economic growth as they raised oil production and defence spending.
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