Stagflation risks stacking up as Iran war enters third month
Stagflation risks stacking up as Iran war enters third month
By Alun John, Yoruk Bahceli and Dhara RanasingheThu, April 30, 2026 at 4:08 AM UTC
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FILE PHOTO: A trader reacts in front of his screens at the Frankfurt stock exchange March 16, 2015. Germany's DAX was up 1.9 percent at 12,133, a record level on Monday. REUTERS/Ralph Orlowski/File Photo
By Alun John, Yoruk Bahceli and Dhara Ranasinghe
LONDON, April 30 (Reuters) - Financial markets are finding it harder to look past the rising economic costs of the Iran war as the continued closure of the Strait of Hormuz prolongs the world's biggest-ever disruption to energy supplies.
Two months into the conflict, the global economy faces a toxic mix of slowing growth and high inflation - stagflation.
Even as tech stocks lift world shares, analysts warn that the longer Hormuz remains shut, the greater the recession risk for energy-importing regions.
"The probability of a recession in Europe, the UK, and parts of Asia, is higher than is priced into equity markets," said RBC BlueBay's head of market strategy Mike Bell.
Here is how the risks are shaping up across markets:
Oil remains the key barometer.
Brent crude is trading at around $112 a barrel, more than 50% above pre-war levels, and continues to rise as the war drags on. High energy prices threaten growth by squeezing consumers and companies while fuelling inflation.
Citi says it's considering an adverse scenario in which Brent climbs to $120 through year-end, cutting global growth to between 1.5% and 2% and lifting headline inflation to nearly 5%.
Gas prices in Europe and Asia have also risen. Farmers face a second surge in fertiliser prices in four years, while countries including Sweden have warned of potential jet fuel shortages.
Despite sharply higher borrowing costs, the shock has yet to show up clearly in overall financial conditions.
Market-based measures - which track how asset prices affect funding availability and future growth - tightened to their most restrictive since last spring in the U.S. in March, but have since stabilised, helped by April's equity rally, according to a closely watched Goldman Sachs index.
Conditions have tightened modestly in the euro zone and Japan, driven by rising borrowing costs. Britain stands out, with a much sharper tightening that points to a heavier growth hit.
U.S. FACES MORE OF AN INFLATION PROBLEM
The impact varies by exposure to energy flows through Hormuz. In the U.S., gas prices are now below pre-war levels.
Jefferies chief European economist Mohit Kumar said both the scale and nature of the stagflation shock differ across regions.
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"Inflation will still be higher in the U.S. but that's an oil price impact, the impact on growth is much less in the U.S. than Europe."
U.S. business activity picked up in April, though output prices jumped. Consumer inflation expectations for the year ahead jumped to 4.7% this month from 3.8% in March, while market-based gauges have also moved higher.
JPMorgan CEO Jamie Dimon said this week the worst-case scenario of stagflation remained.
Europe's reliance on energy imports leaves it especially vulnerable, with data already pointing to a stagflationary hit.
Data on Thursday is expected to show euro zone inflation nearing 3%. Contracting business activity, tighter bank lending criteria and surging inflation expectations signal mounting pressure.
Germany's IMK institute sees a 34% chance the bloc's largest economy slips into recession in the second quarter, up from 12% in March.
ING's head of global macro Carsten Brzeski said another month of Hormuz disruption would likely trigger at least a technical euro zone recession.
UK business activity has held up better so far, but risks are rising. The IMF hit Britain with the biggest growth downgrade among rich economies.
Reflecting inflation worries, borrowing costs in Europe have risen faster than elsewhere as traders bet on higher UK and euro zone rates. Britain's two-year yields are up 90 basis points since the war began.
Equity markets, perhaps more focused on growth, are down 4% in the euro zone and 5% in Britain, while U.S. shares have risen.
ASIA HARD HIT, CHINA THE OUTLIER
Asia, which typically takes about 80% of Gulf oil exports and 90% of LNG shipments, is bearing the brunt. Parts of South and Southeast Asia are already facing energy shortages.
Foreign investors are pulling out of Thailand, the Philippines is among the hardest hit, and Indian companies could be under pressure.
Elsewhere, the Bank of Japan raised its inflation forecasts and looks set to raise rates.
China is the exception. Backed by ample oil reserves and a diversified energy mix, it grew 5% in the first quarter. Investors are betting on Chinese battery and electric vehicle companies, while low inflation has helped Chinese bonds rise as others fell.
Still, China is not immune. Higher energy costs could squeeze already thin factory margins just as global demand for its exports slows.
(Reporting by Alun John, Yoruk Bahceli and Dhara Ranasinghe. Editing by Mark Potter)
Source: “AOL Money”
