Weekly Update - War in Iran: current observations on the global economy

The conflict has now entered its fifth week, and its outcome remains uncertain. Tensions in energy markets persist, while monetary and financial conditions are tightening. The first statistics released for March so far show virtually no impact on economic activity, whereas price pressures are already rising significantly. This configuration remains consistent with our central scenario, although it calls for heightened vigilance.

Persistent energy tensions. At this stage, disruptions to energy supply remain contained, thanks in particular to the use of strategic reserves, rapid geographical arbitrage and, in some countries, demand management policies. As a result, the impact of the conflict is primarily reflected in price pressures, affecting both oil and gas (+80 % for Brent prices since the beginning of the year and +76 % for European gas prices), without yet reaching the scale of past energy crises. While the International Energy Agency highlights the fragility of the current balance, futures markets continue to anticipate a gradual easing in prices, reflecting expectations either of a de escalation of the conflict or a progressive normalization of flows.

Tightening monetary and financial conditions. Equity markets have posted moderate declines since the beginning of the year, and the increase in volatility remains contained, signalling a still measured market reaction. By contrast, movements in bond markets have been more pronounced. Yields, particularly at the short end of the curve, have risen significantly, reflecting a reassessment of monetary policy paths. Energy tensions are increasingly perceived as a source of persistent inflationary pressures rather than a directly recessionary shock.

Early indicators for March confirm rising inflation. Business sentiment indicators published for March in the euro area and the United States send a similar signal: activity remains broadly resilient, but price pressures are intensifying. Surveys point to rising input costs and a gradual pass through to selling prices. Inflation data in the euro area (2.5 % in March) already show a noticeable acceleration, particularly in energy related and services components. This assessment is widely shared by the consensus of economists, who have modestly revised growth prospects downward while primarily revising inflation trajectories upward.

An unchanged central scenario, but sustained vigilance. In this context, our central scenario remains one of resilient economies facing higher and more persistent inflation. The main source of uncertainty now lies in the duration of the conflict and the scale of lasting disruptions to energy supply. As long as the global economy absorbs the shock, the situation remains manageable. However, the longer the conflict persists, the greater the risk of a shift from a transitory shock to a lasting macroeconomic shock. Today, the duration of the conflict—more than the initial shock—remains the key risk factor.

Read full article