31 March 2026
Ongoing Middle East conflict disrupts global energy and manufacturing, creating uncertainty over supply and economic stability.
Widespread shortages and rising prices threaten recession, while central banks struggle to balance inflation and growth risks.
Financial markets face volatility and downside risks, with slower global growth and higher inflation versus 2026, even if the conflict ends soon.
Given the fast-moving situation and enormous uncertainty, here is a recap of my thoughts on the current situation in the Middle East and what it could mean for the global economy and markets.
- A significant global supply shock is unfolding amid severe destruction and disruption to Middle Eastern production and trade in energy, commodities and manufacturing. The scale and duration of the shock remain uncertain.
- When the war started, we assumed it would take about six weeks before widespread shortages emerged – this timeline probably still makes sense, suggesting two more weeks of runway before serious dislocations emerge.
- US President Donald Trump may have lost control of the situation, which makes a quick (unilateral) resolution harder and increases the risk that the Strait of Hormuz remains blocked even once fighting ends.
Oil/gas/manufacturing disruptions
- The world consumes approximately 100 million barrels of oil per day. The conflict has disrupted about 20 million barrels of flow, with roughly half of that supply fully stranded – judging by prevailing best guesses.
- This disruption, which includes gas as well as a host of other critical inputs, will impact virtually all energy and energy-intensive sectors, including pharmaceuticals, travel, agriculture, chemicals, and technology.
- The shock appears to be spreading from west to east – with shutdowns already in place in parts of Asia and Australia. If Europe is next, this will amplify global recession fears.
Three stages of the shock
- Stage 1: Energy and commodity prices rise in response to fears of shortages, but hard disruptions are mostly avoided as governments and companies draw on strategic reserves, floating inventories, and other buffers. We remain in stage 1.
- Stage 2: Genuine shortages emerge and weigh on economic activity. To put this in perspective, the disrupted oil volume is roughly equivalent to daily oil consumption of the United States.
- Stage 3: Financial system dislocations emerge as revenues and profits weaken and default risks rise. Concerns over tech valuations, hidden leverage, and outflows from private credit markets amplify fear and volatility.
Central bank policy and macro risks
- Money markets bet that central banks will respond with rate hikes, as they did during the Russia-gas crisis in 2022. Although it cannot be fully ruled out, this call looks premature, in my view.
- Today’s environment is different: demand is weaker, fiscal policy is tighter, and both financial and monetary conditions are more restrictive. These factors increase the risk of recession, combined with a smaller – though still serious – inflation spike.
- A risk to watch is that, if a recessionary scenario begins to unfold, central banks will need to wait for inflation to fall back to target before they can begin easing policy to support economic activity.
Financial market outlook
- Higher benchmark interest rates tighten financial conditions and put downward pressure on valuations.
- The supply shock is constraining output, and higher prices are squeezing margins across markets.
- Demand side stimulus, which can support risk during normal recessions, is ineffective and risks amplifying inflation risks.
- The ongoing war injects significant uncertainty into the outlook. Valuations and capital markets activity could remain impaired for some time.
Scenarios
- Base case: Slower growth and higher inflation for major economies versus 2026. This is probably baked in already, even if the war ended tomorrow and the Strait re-opened. If the fighting ends before the end of April, economic aftershocks could be felt for around six months.
- Downside: If the war drags on, there is a real risk of an inflationary recession unfolding in major economies, with central banks struggling to ease policy until inflation risks fade. Rate hikes could not be ruled out.
- Upside: If the conflict ends quickly, central banks could pivot to support demand, providing significant support to risk markets.
