Economy
Iran war reveals Trump’s tight spot: The economy
Seven weeks of war have failed to remove Iran’s leadership or force it to meet all of U.S. President Donald Trump’s demands, but for both U.S. adversaries and allies, it has cast a spotlight on one of his main vulnerabilities: economic pressure.
Even with Iran’s announcement on Friday that it was reopening the Strait of Hormuz to shipping, the Middle East crisis has revealed the limits of Trump’s willingness to tolerate domestic economic pain.
Trump joined Israel in attacking Iran on Feb. 28 based on what he said were imminent security threats, especially over its nuclear program. But now, with U.S. gasoline prices high, inflation rising and his approval ratings down, Trump is racing to secure a diplomatic deal that could stem the fallout at home.
Iran has taken a beating militarily, but demonstrated it can exact economic costs that Trump and his aides underestimated, unleashing the worst-ever global energy shock, analysts say.
Rising energy costs, recession risks
Trump has often publicly shrugged off domestic economic concerns driven by the war.
However, he can hardly ignore that although the U.S. does not depend on one-fifth of global oil shipments that were effectively blocked by Iran’s chokehold on the strait, surging energy costs have hit U.S. consumers.
The International Monetary Fund’s (IMF) warning of a risk of global recession adds to the gloom.
Pressure for a way out of the unpopular war has mounted as Trump’s fellow Republicans defend narrow majorities in Congress in the November midterm elections.
None of this has been lost on Iran’s leaders, who have used their grip on the strait to push Trump’s team to the negotiating table.
Analysts say U.S. rivals China and Russia may draw their own lesson: while Trump has shown an appetite for military force in his second term, he looks for a diplomatic off-ramp as soon as the economic heat becomes uncomfortable at home.
“Trump is feeling the economic pinch, which is his Achilles heel in this war of choice,” said Brett Bruen, a former foreign policy adviser in the Obama administration who heads the Global Situation Room strategic consultancy.
White House spokesperson Kush Desai said that while working toward a deal with Iran to resolve “temporary” energy market problems, the administration “has never lost focus on implementing the president’s affordability and growth agenda.”
“President Trump can walk and chew gum at the same time,” he said.
Feeling the pressure
Trump’s abrupt shift on April 8 from airstrikes to diplomacy followed pressure from financial markets and parts of his MAGA base.
Some of the economic pain is borne by U.S. farmers, a key Trump constituency, due to disrupted fertilizer shipments, and is also reflected in higher airfares from increased jet fuel prices.
With the clock ticking on a two-week cease-fire, it remains to be seen whether a president who embraces unpredictability will reach a deal that meets his war goals, extend the truce beyond April 21, or relaunch the bombing campaign.
But global oil prices fell sharply and financial markets, which Trump often sees as a barometer of his success, flourished on Friday after Iran said the strait would be open for the remainder of a separate U.S.-brokered 10-day truce between Israel and Lebanon.
Trump was quick to declare the strait safe as he touted a deal-in-the-making with Iran that he said would be completed soon and mostly on his terms. But Iranian sources told Reuters gaps remained to be resolved.
Experts have warned that even if the war ends soon, the economic damage could take months if not years to fix.
A key question is whether any deal achieves the objectives Trump has laid out, including closing Iran’s path to a nuclear weapon, which Tehran has long denied it is seeking.
Iran has a stockpile of highly enriched uranium believed to be buried by U.S.-Israeli strikes last June. Trump told Reuters on Friday that the emerging deal calls for the U.S. to work with Iran to recover the material and bring it to the U.S. Iran denied agreeing to a transfer anywhere outside its territory.
A senior Trump administration official said the U.S. was maintaining “several redlines” in negotiations with Iran.
At the same time, Trump’s call at the war’s outset for Iranians to overthrow their government has gone unheeded.
Allies from Europe to Asia were initially stunned by Trump’s decision to go to war without consulting them or seeming to take into account the risk to them of Iran closing the strait.
“The alarm bell ringing for allies right now is how the war has highlighted that the administration can act erratically, without much regard for consequences,” said Gregory Poling, an Asia expert at the Center for Strategic and International Studies in Washington.
After Russia’s 2022 invasion of Ukraine, former Democratic President Joe Biden was cautious about imposing sanctions on Moscow’s energy sector out of concern for reducing oil supplies and inflating U.S. gas prices.
But Trump, who ran for a second term on promises of cheap gas and low inflation, has shown himself sensitive to accusations that his policies raise prices. An example was when he reduced tariffs on China last year after it retaliated.
Miscalculations
Just as Trump misjudged Beijing’s response in a trade war, he seems to have miscalculated how Iran might strike back economically in a shooting war, by attacking energy infrastructure in Gulf states and blocking the strategic waterway between them.
Trump mistakenly believed the war would be a limited operation like the Jan. 3 lightning raid in Venezuela and June’s strikes on Iran’s nuclear sites, U.S. officials have said privately.
But this time the repercussions are more far-reaching.
The message to Asian allies such as Japan, South Korea and self-ruled Taiwan may be that Trump, who is looking for warmer ties with China, can be expected to pursue his regional goals with less regard for their geopolitical and economic security.
Analysts believe those governments will adjust for any contingency, such as a Chinese bid to seize Taiwan, out of concern over Trump’s reliability.
European countries, annoyed they are bearing so much of the economic brunt of a war that they never asked for, are likely to be even more nervous about Trump’s commitment to continued aid to Ukraine in its war with Russia, analysts say.
Gulf Arab states want the war to end soon, but will be unhappy if Trump cuts a deal without security guarantees for them.
“An end to this conflict should not also create a continuous instability in the region,” said Anwar Gargash, diplomatic adviser to the president of the United Arab Emirates.
Most MAGA supporters have stuck with Trump despite some prominent dissenting voices. But there are growing doubts whether he can help his party recover lost ground, especially with independent voters, in time for the midterms.
“He’s aware that a significant portion of the country outside his MAGA base, and even some within the MAGA base, are vehemently opposed to what he’s done,” said Chuck Coughlin, an Arizona-based political strategist.
“And I think the price is going to come due.”
The Turkish central bank raised its interim inflation targets on Thursday, warning it believed that an inflationary impact would remain present in the short-term due to tensions in the region amid the Iran war.
The Central Bank of the Republic of Türkiye (CBRT) lifted its end-2026 interim inflation target to 24% from the previous 16% and end-2027 target to 15% from 9%, Governor Fatih Karahan said.
Presenting the central bank’s quarterly inflation report in Istanbul, Karahan said the bank set its end-2028 interim target at 9%.
While also setting forecasts at 26%, 15% and 9% for the said years, the governor announced that the bank decided to suspend the forecast range approach.
Annual inflation in Türkiye stood at around 32.4% in April, according to official data.
The British economy grew in line with expectations in the first quarter of the year, official data showed Thursday, offering a rare boost to Prime Minister Keir Starmer as he scrambles to stay in power.
Gross domestic product (GDP) rose 0.6% in the January-March period, up from a revised expansion of 0.2% in the final three months of last year, the Office for National Statistics (ONS) said.
It added that GDP grew 0.3% in March alone, beating analysts’ expectations, despite the economic fallout from the Middle East war.
“Today’s figures show the government has the right economic plan,” Treasury chief Rachel Reeves said after the data release.
The economy “is in a stronger position as we deal with the costs of the war in Iran,” she added. “Now is not the time to put our economic stability at risk.”
The figures come as Starmer battles to face down a revolt within his Labour Party in the wake of heavy defeats in local and regional elections last week.
The elections saw strong gains for the hard-right Reform UK party and the left-wing populist Greens, at Labour’s expense.
The results capped a difficult few months for Labour, which has struggled to revive Britain’s economy since winning a general election in July 2024, having raised taxes in its two annual budgets.
There were signs of progress earlier in the year, with inflation easing toward the 2% target set by the Bank of England (BoE) and unemployment unexpectedly falling in February.
But rising energy prices stemming from the Middle East war, which began with U.S.-Israeli strikes on Iran on Feb. 28, have reignited inflationary pressures and threaten to derail growth.
The U.S. Senate on Wednesday approved Kevin Warsh as the next Federal Reserve chair, placing him at the helm of the central bank as it faces mounting political pressure and with inflation at a three-year high.
The Senate voted 54 to 45 to in favor of Warsh, with Republicans holding a slim majority and ensuring President Donald Trump’s nominee to replace Jerome Powell was confirmed.
Once known as a monetary “hawk” against inflation, Warsh has shifted in line with Trump’s push for lower interest rates that has posed an unprecedented challenge to the Fed’s independence.
The incoming Fed chair, confirmed for a four-year term, has promised to bring “regime change” at the bank, which he has criticized as too political and too open in communicating its decision-making.
But with inflation still above the Fed’s long-term two-percent target, and rising over Trump’s Iran war, Warsh is unlikely to convince fellow members of the bank’s rate-setting committee to cut immediately.
That could leave him open to attacks from Trump, who has relentlessly lashed out at Powell over rate decisions.
“Warsh’s biggest challenge will likely be dealing with President Trump,” said David Wessel, senior fellow at the Brookings Institution.
“The president does not respect the independence of the Fed and he wants interest rates to be lower.”
Fed independence attacks
In January, Powell said a Justice Department criminal probe against him over cost overruns related to a building renovation project was intended to create pressure on monetary policy decision-making.
That followed Trump’s separate attempt to oust Fed Governor Lisa Cook from the board.
The criminal probe against Powell has since been dropped, as the Trump administration aimed to smooth the path for Warsh’s nomination. The Supreme Court is due to rule on the legality of removing Cook.
Both moves were “unprecedented,” said Kathryn Judge, a Columbia law professor who focuses on banking.
While Warsh is Trump’s pick, as Powell was nine years ago, Judge said there was no reason to believe the pressure will ease.
“Fed officials have been put on notice that this president is willing to use all available tools to bully them into acceding to his demands,” she said.
Economic challenges
Warsh is taking over as the world’s largest economy continues to reel from repeated economic shocks.
The pandemic delivered a hammer blow to the Fed’s inflation target, with CPI peaking at 9.1 percent in mid-2022. It has since come down, but US households have been battered by years of higher-than-expected price increases.
In April, year-on-year inflation came in at a three-year high of 3.8 percent, fueled in part by surging oil prices in the wake of the US-Israel war on Iran.
The Fed’s other mandate is ensuring maximum employment. The unemployment rate has remained relatively firm at around 4.3 percent, but the steady number hides churn beneath the surface.
Job growth has been weak, see-sawing between expansion and contraction for months, with new jobs mainly driven by the health care sector.
The tumult has been partly hidden because there has been a significant drop in labor supply, driven by Trump’s deportation drive and an ageing population.
The situation has put Fed policymakers in the difficult position of having to choose between dueling mandates: raise interest rates to combat inflation, or cut them to spur growth?
A house divided
It is here that Warsh faces his third major challenge: divisions on the Fed’s rate-setting committee on the path forward.
At the last meeting, there was a rare outpouring of dissent, with three members declaring that the Fed should indicate a rate hike could be on the cards to combat inflation.
“One of Warsh’s challenges is that the Fed does seem divided — at times along partisan lines, which is a change from the past,” said Wessel.
Added to that another wrinkle: Powell will be the first outgoing chair in more than 70 years not to leave the board at the expiration of his term as its head.
Türkiye expects its current account deficit to widen this year due to high energy and non-energy commodity prices, Treasury and Finance Minister Mehmet Şimşek said on Wednesday.
But, Şimşek said, the deterioration is likely to remain temporary and manageable thanks to stronger macroeconomic fundamentals and policy gains.
His remarks came after Wednesday’s official data showed Türkiye registered a current account deficit of $9.6 billion in March, mainly due to a higher trade gap.
The figure was in line with market expectations but still marked the highest monthly gap in three years.
Türkiye’s external balance has been in focus due to the country’s heavy reliance on imported energy, whose prices spiraled due to the Iran war that has effectively shut the key Strait of Hormuz.
Excluding gold and energy, the current account deficit stood at $3.9 billion in March, the Central Bank of the Republic of Türkiye (CBRT) said. Goods recorded a gap of $9.5 billion, while services posted a surplus of $2.6 billion.
On annualized terms, the shortfall totaled $39.7 billion, or approximately 2.6% of gross domestic product (GDP).
The goods deficit recorded as $77.8 billion, while services recorded a net surplus of $63 billion. The primary and secondary income realized a net deficit of $23.8 billion and $1.1 billion, respectively.
Şimşek said elevated global commodity prices would put pressure on the external balance, but emphasized that the government’s economic program had improved resilience against such shocks.
“This year, the current account deficit will increase due to the high course of energy and non-energy commodity prices,” he wrote on the social media platform X.
“Thanks to the gains achieved through our program and strengthened macroeconomic foundations, we assess that this increase will remain at manageable levels and be temporary.”
The minister noted that the annualized current account gap was expected to decline significantly in April, supported by an improvement in the foreign trade balance.
However, he warned of a temporary deterioration in May, citing the impact of an extended public holiday period that is likely to disrupt economic activity.
“At the same time, we observe that the war’s impact on tourism revenues has remained limited,” Şimşek said
Tourism is a critical component of Türkiye’s external financing, helping offset part of the country’s structural energy import bill.
Şimşek also noted that direct foreign investment inflows totaled $1 billion in March, bringing annualized foreign direct investment to $12.6 billion.
He said Türkiye’s sovereign risk premium, measured by credit default swaps (CDS), had moved closer to pre-war levels, while debt rollover ratios remained strong.
“Our country’s risk premium is approaching pre-war levels, while the high trend in debt rollover ratios continues,” Şimşek said.
He added that the new investment incentive package currently under discussion in Parliament was expected to strengthen Türkiye’s financing structure and support long-term capital inflows.
“We continue policies that reduce external energy dependency while supporting value-added production and the green transformation,” he said.
Ankara and Brussels praised the momentum in their economic relations on Wednesday after a visit by a high-level delegation this week that saw series of meetings and agreements.
The delegation was accompanying Belgium’s Queen Mathilde as part of a high-level economic mission aimed at strengthening trade and investment ties between Türkiye and Belgium.
Queen Mathilde was received by President Recep Tayyip Erdoğan and met with top Turkish authorities, while also attending a series of meetings and events.
The delegation included 400 representatives of the Belgian federal and regional authorities, companies, federations, chambers of commerce and academic institutions.
Both sides noted that Türkiye-Belgium economic relations continue to benefit from the broader framework of Türkiye-EU relations, including the 1963 Ankara Agreement and the Türkiye-EU Customs Union.
“In this vein, they recognized the importance of the Türkiye-EU relationship and expressed support for constructive engagement, including discussions on the modernization of the Customs Union and continued facilitation of business and people-to-people mobility, in accordance with EU frameworks and benchmarks,” a joint statement said on Wednesday.
In addition to strengthening economic cooperation, they said the mission constituted an important step in building more structured and closer political relations.
Belgium last organized an economic mission to Türkiye in 2012, when the visit was led by King Philippe, then crown prince.
Talks and meetings during the five-day visit focused on strategic sectors such as energy, aerospace and defense industry, logistics and transportation, digital transformation and industry 4.0, and life sciences and pharma.
“As long-standing partners and NATO Allies, Turkish and Belgian sides noted with pleasure the momentum in their relations, facilitated by joint efforts and a shared interest in international peace and stability in view of regional and global developments,” the statement read.
Both sides said they acknowledged the deep-rooted relations and reaffirmed the contributions of the Belgian-Turkish community to political, economic, cultural and social ties.
The visit saw the signing of multiple bilateral agreements and memoranda of understanding, providing updated frameworks for cooperation and facilitating closer engagement in areas of mobility, defense, social protection and safety of agri-food products.
Officials said the two countries are aiming to increase the bilateral trade volume to $15 billion (TL 681.27 billion) in the near term.
Their trade reached $9.2 billion in 2025, including $5 billion in Turkish exports and $4.2 billion in imports.
They also expressed a major potential and a need for investments to increase.
Belgian investments in Türkiye totaled $9.3 billion between 2002 and January 2026, while Turkish investments in Belgium amounted to $490 million.
President Donald Trump arrived in Beijing on Wednesday for a two-day summit with Xi Jinping, receiving a lavish welcome alongside an entourage that included Nvidia CEO Jensen Huang and Elon Musk, as he prepared to press China to “open up” to U.S. business.
Trump is seeking to snag some economic wins on the first visit by a U.S. president to China in nearly a decade and maintain a fragile trade truce to prop up public approval ratings bruised by his war with Iran.
He was welcomed by Chinese dignitaries, a tightly choreographed formation of military honor guard and dozens of Chinese students waving U.S. and Chinese flags as he disembarked Air Force One in the waning hours of twilight on Wednesday.
Pausing midway down the red carpet as the students chanted “welcome, welcome, warm welcome” in Mandarin, he punched the air and smiled broadly before departing in his limousine.
The CEOs accompanying Trump are drawn mainly from companies seeking to resolve business issues with China, such as Nvidia, which has struggled to get regulatory permission to sell its powerful H200 artificial intelligence chips there.
Trump asked Huang at the last minute to join the trip, said a source familiar with the matter who spoke on condition of anonymity, and he was spotted boarding Air Force One during a refueling stop in Alaska en route to Beijing.
“I will be asking President Xi, a Leader of extraordinary distinction, to ‘open up’ China so that these brilliant people can work their magic,” he said in a post on Truth Social, referring to the CEO delegation.
“I will make that my very first request.”
Asked about Trump’s post, Guo Jiakun, a spokesperson for China’s Foreign Ministry, said Beijing stands ready to “expand cooperation, manage differences and inject more stability and certainty into the turbulent world.”
As Trump prepared for the pomp-filled occasion, his trade negotiator, Treasury Secretary Scott Bessent, wrapped up three hours of preparatory talks with Chinese officials in South Korea. China’s official Xinhua news agency described them as “candid, in-depth and constructive,” but officials did not offer any detailed summary.
Trump’s two days of meetings will include a grand reception at The Great Hall of the People, a tour of Beijing’s 600-year-old Temple of Heaven imperial religious complex, and a state banquet.
Apart from trade, the talks will cover a host of sensitive subjects from the Iran war to U.S. arms sales to Taiwan, the island that China regards as part of its territory.
Trump is widely expected to encourage China to convince Tehran to make a deal with Washington to end the conflict, though he has said he did not think he would need its help.
China reiterated on Wednesday its strong opposition to U.S. arms sales to Taiwan, with the status of a $14 billion package awaiting Trump’s approval still unclear.
The United States is bound by law to provide Taiwan with the means to defend itself, despite a lack of formal diplomatic ties.
Bessent preps in South Korea
While Trump rubbed shoulders with executives aboard Air Force One, Bessent held his latest round of trade negotiations with Chinese Vice Premier He Lifeng at a VIP reception room at South Korea’s Incheon airport.
The talks ran about three hours to end just before 4 p.m. (0700 GMT), a U.S. official said.
The two sides are eager to maintain a truce struck last October in which Trump suspended triple-digit tariffs on Chinese goods and Xi backed away from choking global supplies of rare earths, vital in making items from electric cars to weapons.
They are also expected to discuss forums to support mutual trade and investment and dialogue on AI issues, while Washington looks to sell Boeing airplanes, farm goods and energy to China to cut a trade deficit that has long irked Trump, U.S. officials have said.
Beijing, for its part, wants the U.S. to ease curbs on exports of chipmaking equipment and advanced semiconductors.
Trump enters the talks with a weakened hand.
Courts have hemmed in his ability to levy tariffs at will on exports from China and other countries.
The Iran war has also boosted inflation at home and escalated the risk that Trump’s Republican Party will lose control of one or both legislative branches in November’s midterm elections.
Though the Chinese economy has faltered, Xi does not face comparable economic or political pressure.
“The Trump administration needs this meeting more than China does, as it needs to show to American voters that deals are signed, money is made,” said Liu Qian, founder and CEO of Wusawa Advisory, a Beijing-based geopolitical advisory firm.
While Trump has lauded his personal rapport with Xi and respect for China, several Beijing residents told Reuters they viewed his visit with a mixture of hope and suspicion.
“I don’t know if he’s genuinely sincere,” Lou Huilian, a 44-year-old who works in the oil trade, said outside a metro station as she headed to work on Wednesday.
“But speaking as a Chinese person, and as someone working in trade, I just hope some good policies can come out of this.”
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