- The current energy crisis—driven by the Iran war—is seen as worse than past crises, with risks widely underestimated and long-lasting economic fallout expected.
- Europe is especially vulnerable due to energy import dependence, weak growth, and limited policy tools, while high oil prices raise stagflation risks globally.
- Expanding conflict is disrupting key oil routes, pushing prices higher and increasing uncertainty, inflation, and global economic slowdown.
The worst energy crisis in history is sending ripples across global markets, and optimism is in short supply. IEA’s chief said the current crisis is worse than all previous ones put together. JP Morgan analysts warned Asia is going to be hit the hardest, although other analysts see Europe as suffering the most from the fallout. And yet it seems the seriousness of the situation has yet to sink in.
The European Central Bank’s president, Christine Lagarde, said in a recent interview with The Economist that the risks stemming from the U.S. and Israeli war against Iran are being underestimated. She struck a somber note, suggesting that those expecting a fast return to normalcy when the war ends were “overly optimistic” and added that “We are facing a real shock…probably beyond what we can imagine at the moment.”
The grim warning was a change of tune for the top EU banking official, who had earlier this month taken a more cautious stance on the war and its effects on the European economy, saying it was too early to say how things were going to turn out, signaling the ECB would not be rushing into any monetary policy adjustments but it stands ready to use them. Interestingly, Lagard admitted last week that no amount of monetary policy adjustments could bring down energy prices, essentially confirming expectations that Europe is in for a lot of pain.
The sentiment was echoed by the president of Barclays, Stephen Dainton, who warned last week that market players were underestimating the effect of energy price inflation on the broader economy. “If current events continue into the summer with at $110–$130 a barrel, that’s a significant concern for credit repricing, growth, and stagflation risk,” Dainton told Bloomberg in an interview.
The financier noted that Europe stands to suffer the most, pointing out the European Union’s limited fiscal resources, the slow growth of the member states’ economies, and their dependence on oil and gas imports. An additional point that could be made in this respect is the EU’s determination to replace hydrocarbons with wind and solar, which has led to the shutdown of coal power generation capacity that could have come in handy right now, as it did in Asia.
While Lagarde believes recovery from the impacts of the war would take a long time, Barclays’ Dainton told Bloomberg the rebound would be quick—on financial markets. He also said he was especially upbeat about the United States, saying, “The investment cycle in technology, power, and defense is enormous. For now, the US consumer remains exceptionally strong, and this supports resilience in risk assets.”
The OECD was not as optimistic about the world’s largest economy. In a recent forecast, the organization predicted that U.S. inflation could hit 4.2% this year because of the war, while economic growth slows to 2% as a result of increased pressure on consumers, the OECD also said, as cited by the Financial Times. Global growth, the forecast said, is set to slow to 2.9% this year, from 3.3% in 2025.
Meanwhile, oil prices are on course for what Reuters called a record monthly jump earlier today, after the Yemeni Houthis entered the war, striking Israel. Observers have feared Houthi involvement in the hostilities after the Yemeni group paralyzed maritime traffic in the Red Sea a couple of years ago. Now, with Hormuz closed, traffic disruption in the Red Sea would have a much more painful effect on the global economy.
“The speed and magnitude of the move underscore how quickly energy markets are repricing geopolitical risk, challenging earlier efforts to keep both oil and bond markets anchored, and reinforcing the risk of sustained disruption in the Strait,” Yardeni Research said in a note, as quoted by CNBC. This goes counter to doubts that traders are aware of the gravity of the geopolitical situation and its impact on energy security, which could be seen as a positive sign.
In a further positive sign, President Trump called the current Iranian leadership “reasonable” suggesting a potential change of heart regarding negotiations, to be mediated by Pakistan. Still, any optimism would be premature, after Trump also said he wanted to take over Iran’s oil, which would hardly be conducive to productive talks.
In an interview with the Financial Times, Trump said that “To be honest with you, my favourite thing is to take the oil in Iran but some stupid people back in the US say: ‘why are you doing that?’ But they’re stupid people.”
The mixed signals will quite likely add to market turbulence and uncertainty, which would in turn feed inflationary forces, especially as the energy export disruption in the Middle East persists. If that disruption deepens because of Houthi involvement, the pain that pretty much everyone predicts for the world economy will deepen and extend in time.
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