Five months into the Iran war, the global factory floor is starting to crack. Manufacturing surveys released in early August 2026 show a sector caught in the worst kind of economic pincer: demand is falling while costs are climbing.

China’s manufacturing activity contracted in July, dragged down by weaker external demand and ballooning input costs tied directly to the Middle East conflict. Europe isn’t faring much better, with manufacturers across the continent reporting some of their steepest operating cost increases in years. The common thread is energy, and the chokepoint is the Strait of Hormuz.

The Hormuz problem

Roughly a fifth of the world’s oil passes through the Strait of Hormuz on any given day. The Iran war, which began in early March 2026, has disrupted shipping through that corridor, pushing oil and energy prices higher and creating a cost shock that manufacturers can’t easily absorb.

Chemical and steel producers in the UK and EU have responded by slapping surcharges of up to 30% on their products. European manufacturers had already reported their highest input cost increase in four years back in May 2026, and those pressures have only intensified through July.

China feels the squeeze

China’s manufacturing contraction in July is particularly telling. When Chinese manufacturers report weaker external demand, it means the rest of the world is buying less stuff. On the cost side, Chinese factories are dealing with the same elevated energy and raw material prices as everyone else.

Economists are now openly warning about deindustrialization in parts of Europe, where factories don’t just slow down temporarily but close for good because the economics no longer work.

What this means for markets and crypto

For traditional markets, rising input costs are set to squeeze profit margins across manufacturing sectors globally. The specter of stagflation puts central banks in an impossible position: cutting rates to stimulate growth risks fueling inflation further, while raising rates to tame prices risks deepening the demand slump.

For crypto markets, sustained geopolitical conflicts historically create a risk-off environment where investors pull back from speculative assets, but they also erode confidence in traditional financial systems and fiat currencies, which can drive capital toward Bitcoin and other digital assets as alternative stores of value.