I wish I had better news to discuss, but the conflict involving Iran is dominating global headlines.

We are living through a prolonged period of geopolitical tension: Ukraine, Gaza, Venezuela, and now Iran, alongside ongoing flashpoints such as Taiwan/China, India/Pakistan, and North/South Korea.

These conflicts are no longer distant geopolitical issues. They are increasingly influencing global markets, the cost of capital, and investment decisions.

Five Economic Impacts Worth Watching

1. Uncertainty is rising again

   Global uncertainty was already elevated following the U.S. election, tariffs, and trade tensions. Geopolitical escalation adds another layer of unpredictability. While day-to-day leasing decisions may continue as usual, larger investment and lending decisions tend to slow when uncertainty rises.

2. Borrowing costs are increasing

   Bond markets reacted quickly. Government bond yields have increased across most major economies, pushing borrowing costs higher. Even a modest increase in yields can significantly affect real estate valuations and financing strategies.

3. Oil prices are rising sharply

   Oil prices have moved closer to $100 per barrel as shipping routes and energy infrastructure face disruptions. A key concern is the Strait of Hormuz, a strategic passage through which roughly 20% of the world’s oil supply flows. Any disruption in this region can have immediate consequences for the global economy.

4. Inflation concerns are returning

   Higher energy prices can quickly translate into higher transportation, production, and consumer costs. This creates a challenge for central banks, including the Bank of Canada, when determining the future direction of interest rates.

5. The ripple effects go far beyond energy

   Shipping disruptions are also affecting fertilizer and agriculture, air travel, global supply chains, precious metals, currencies, and equity markets.

The Canadian Impact: Borrowing Costs

For Canada, the most significant impact may ultimately be borrowing costs. Just as markets were expecting stability, or possibly some relief in interest rates, global geopolitical risk is pushing bond yields higher again.

In Canada, government bond yields have already risen noticeably in recent weeks. Even a 0.25% shift in yields can significantly affect mortgage rates, commercial financing, and investment returns.