Global growth under pressure from energy risks

As the Iran war unfolds, markets confront a familiar shock pattern: inflation pressure from energy prices alongside slower growth, with global outcomes hinging on conflict duration.

Another spring, another global shock, another uncertainty spike

Recent major shocks to the global economy have all clustered around the March–April timeframe (Covid, Ukraine war, regional bank crisis, tariffs). This complicates the assessment of the economic impact. The trajectory shifts early, so the cumulative effect can be dramatic; but there is also time for corrective action to mitigate the hit.

Arguably, in all these prior instances, the ultimate economic outcomes were less dire than initially feared. Will this again be the case with the Iran war? Possibly, maybe even probably. It is what we are leaning towards for the time being. One reason for this is that widely different geopolitical scenarios can amount to similar economic outcomes.

For example, Iran could agree to reopen the Straits of Hormuz after it obtains desired concessions, or the US (and allies) could force it to open militarily. The geopolitical implications are vastly different, the economic ones less so.

In any case, there are important lessons to be learned from the Liberation Day experience. Scenarios that are unbearably costly to all parties involved tend not to materialize because nobody truly wants them to. An extended or indefinite closure of the Straits is, in our view, such an unbearably costly scenario.

We are unsure of the path to resolution but nonetheless anticipate a less onerous outcome.

Still, there is an undeniable inflationary shock here, and a simultaneous dent to growth. The shorter the conflict, the more the shock is largely inflationary; the longer it is, the more growth takes a hit.

Either way, we do not believe that the dramatic hawkish shift in policy rate expectations is warranted. It is fine for central banks to warn about the possibility of rate hikes to combat inflation, but the likelihood that they will actually deliver them is still low in our view.

Admittedly, the sole inflation mandates that most central bankers operate under argue for earlier tightening outside of the US. Yet the memory of past policy mistakes (especially for the ECB, whose premature tightening during prior downturns proved very ill‑advised) should stay most policymakers’ hands enough to allow for a diffusion of the conflict. At least we hope so.