In Summary
The war in the Middle East sets the stage. For the US and Europe, we expect lower growth, higher inflation, stronger fiscal pressure and a challenging situation for central banks. Global GDP is expected at +2.6% in 2026 (revised down by –0.5pp), inflation at 3.2% in the US and 3.0% in the Eurozone this year (revised up by +0.7pp and +1.1pp, respectively) and trade growth at +1.5% in 2026 (revised down –0.5pp). Growth is expected to stay at +2.1% in the US and +0.8% in the Eurozone and deficits will remain elevated: -7% of GDP in the US and -3.0% in Europe, while higher debt-servicing costs limit room for support. Oil prices are expected to hover around 80 USD/bbl at end-2026 after reaching a record high in Q1 2026 on the back of geopolitical volatility. The Fed is expected to look through the inflation spike and remain on hold, with only one cut in early 2027. The ECB is likely to deliver a +25bps hike to anchor expectations, then pause as growth weakens. Both central banks will treat the shock as temporary in the baseline scenario, but prolonged energy pressures would trigger a more hawkish response.
The Gulf countries (GCC) and Asia remain most directly exposed while China should still grow by +4.6% in 2026. Watch for triple-deficit economies facing recession risks while some commodity exporters benefit from diversification. Triple-deficit economies, combining fiscal, current account and energy deficits, are particularly vulnerable to capital outflows, higher inflation and recession. GCC economies face trade, tourism and real-estate risks despite high financial buffers and we have revised their growth forecast by -2.1pps. For Asia, the end-2025 growth tailwind of +0.2pp has been erased. Latam is relatively more insulated from the shock, with countries such as Argentina, Brazil and Mexico benefiting from their position as commodity exporters.
For corporates and consumers: a broad-based cost shock, on top of pre-existing vulnerabilities. Higher energy, metals and fertilizer prices are creating a cost-push shock amid weak demand and elevated US tariffs, expected to hover around 10%. Energy producers and defense benefit, while energy-intensive, transport and consumer sectors face margin pressure. Tighter financial conditions and weaker demand are expected to push global insolvencies higher in 2026. Weakened consumer sentiment, labor markets and purchasing power in the context of high fuel and food prices are the main challenges ahead.
Capital markets: pricing in a geopolitical stagflation scare. Since the outbreak of the Middle East conflict, investors have shifted decisively into a stagflationary risk‑off mode. Yield curves have risen and bear-flattened (front end: +50–90bps; long end: +40–70bps) as markets factor in a short‑term inflation spike and, as a consequence, hawkish reactions from central banks (expected end-of-year policy rates for the Fed and ECB rose 60bps and 90bps). At the same time, overseas demand appears to be softening as EM central banks draw down FX reserves to stabilize weakening currencies and finance elevated oil and gas imports. The growth scare is reflected in broad equity losses (US: –8%; Europe: –10%; EMs: –12%) and a pronounced flight to the ultimate safe asset: USD (trade‑weighted +2.5%) cash. Even gold has retreated (–13%), unwinding its earlier exceptional rally and facing selling pressure from countries tapping savings to pay for energy. Credit spreads have widened only modestly (+13bps for Euro IG; +26bps for HY), but broadly in line with previous geopolitical shocks. Importantly, markets still do not expect a structural regime shift: longer‑term inflation expectations remain well anchored (5y5y), and oil forwards for December are 30 USD below the current price. Our baseline scenario broadly aligns with this view: assuming the conflict and energy disruptions ease within three months, we expect a broad‑based asset‑market recovery as the year progresses (US 10y: 4.5%, DE: 2.8%, S&P500: +6%, Eurostoxx +5%). In the near term, however, further volatility and new market extremes remain likely.
It could get worse before it gets better: A worsening of the conflict would cause a stagflationary recession. Mind the chain reaction. In our downside scenario, a prolonged closure of the Strait of Hormuz (>3 months) would magnify the economic shock, with oil rising temporarily to 180 USD/bbl and gas to 200 €/MWh before easing back to 85 USD/bbl and gas to 65 €/MWh towards the end of the year, given the demand-side destruction. The global economy would be pushed into a stagflationary regime, with the Eurozone falling into a technical recession (annual growth at +0.2%) and the US economy significantly slowing down for two years on second-round effects as a strong equity market correction would hit the consumer. Inflation would peak at 4.6% in the Eurozone and 4.9% in the US, forcing central banks into a more aggressive tightening response despite the economic slowdown (ECB: three hikes, Fed: two hikes). For capital markets, this implies a clear risk-off regime: higher yields (US 10y up to 5.7%, DE up to 3.7%), sharp equity corrections with a max drawdown of -30% in Europe and -25% in the US and materially wider credit spreads (Europe IG up to 150bps, HY 440bps), alongside a stronger USD and rising liquidity stress. In this scenario, nonlinear dynamics dominate, with consumer confidence shocks, forced deleveraging and private market stress amplifying the macro downturn.