Prolonged conflict in the Middle East would stretch the resources of oil importers like the Philippines and further hurt consumers already reeling from elevated prices, according to think tank Capital Economics.

In a May 14 report by its global economics team, Capital Economics said that under an “extreme scenario” in which the Iran war escalates further and keeps global oil prices at $150 per barrel until next year, the “world economy would tip into recession, but not a repeat of the 1970s.”

“With inflation nearing 10 percent in several economies, the extreme scenario would imply a significantly larger hit to real incomes and hence consumer spending. What’s more, higher prices and restricted supply of energy and energy byproducts could cause production shutdowns in some sectors,” Capital Economics warned.

“Governments would be likely to direct resources to essential and strategic industries like food, energy systems and possibly autos or electronics. But non-essential energy-intensive sectors like chemicals, metals and construction might see a significant reduction in activity,” the think tank added.

Capital Economics also said consumers may be compelled by higher prices—or potentially direct government intervention—to scale back discretionary activities such as leisure driving and holidays.

The think tank warned that while Gulf economies would face the biggest direct hit from the conflict, the heavier burden would likely fall on low-income emerging markets (EMs)—particularly in Sub-Saharan Africa—due to their dependence on imported fuel and fertilizer, high food inflation exposure, large agricultural sectors, and limited fiscal buffers.

“The worst impacts would extend to import-dependent Asian economies with high reliance on Middle Eastern imports and weak external buffers, including Sri Lanka, Pakistan and the Philippines,” Capital Economics said.

In a separate May 14 report, Capital Economics senior EMs economist Liam Peach noted that since the war erupted in late February, the Philippines and Thailand have so far recorded the fastest jumps in inflation, with both posting spikes of more than four percentage points (ppts).

Philippine headline inflation soared to an over three-year high of 7.2 percent in April, such that the Bangko Sentral ng Pilipinas (BSP) forecasts the 2026 full-year average at an 18-year high of 6.3 percent, the fastest annual price hikes since the global financial crisis (GFC) in 2008.

“There are few signs of a widespread strengthening in food price pressures across EMs last month, although food inflation appears to have picked up in the Philippines, Pakistan, India and Qatar since the start of the Iran war,” Peach further noted.

In a May 19 report, Capital Economics chief EMs economist William Jackson cited that the Bangko Sentral ng Pilipinas (BSP) was among the EM central banks that have raised interest rates amid the energy crisis due to risks arising from balance of payments (BOP) strains as well as “very large inflation shocks.”

The BSP’s policy-setting Monetary Board (MB) hiked the key interest rate by 25 basis points (bps) to 4.5 percent last month, a move seen as the beginning of a tightening cycle aimed at curbing excessive inflation risks.

Jackson also cited the Philippines and Pakistan, where inflation has surged by four to five ppts since February and remained well above target levels, while both countries continue to depend on energy supplies from the Middle East.

For Jackson, “further interest rate hikes lie in store” for both the Philippine and Pakistani central banks. The MB will next decide on its monetary policy stance on June 18, although the BSP has not discounted possible off-cycle decisions based on the latest data.

It does not help that the Philippines is an exception in Asia, where most policymakers have eased price pressures through subsidies or fuel tax cuts to mitigate the impact on households, Jackson said.

In its World Economic Situation and Prospects 2026 Mid-Year Update published on Wednesday, May 20, the United Nations Department of Economic and Social Affairs (UN DESA) said that in the East Asia region, “economies heavily reliant on energy imports from the Middle East—such as the Philippines, Thailand, and Vietnam—are particularly vulnerable to higher energy prices and supply disruptions.”