Uncertainty and resilience on the eve of summer
More than three months into the conflict in the Middle East, the effects of the supply shock triggered by the surge in energy prices will now become increasingly evident in the inflation and growth data. The combination of uncertainty and resilience that has characterised the recent behaviour of the global economy makes for a fragile balance, especially with geopolitical risk remaining so high.
Such an environment demands the utmost flexibility, both in investment strategies and in economic policy responses. It requires economic forecasts to be recalibrated to reflect to a new reality, with much greater volatility in economic and financial variables. All this reflects the ongoing structural reorganisation of the global economy, amid the pursuit of broader economic efficiency encompassing security and resilience.
Currently, of the supply shock’s three transmission channels, the energy channel has been activated with the greatest intensity, as evidenced by the widespread rise in inflation, which is already reducing households’ purchasing power. This, combined with the moderate tightening of financial conditions (far less severe than that which followed the outbreak of the war in Ukraine), will cool private consumption in the middle months of the year and will reduce any potential macroeconomic imbalances that may arise from the gap that has opened up between supply and demand.
In the absence of further negative surprises in energy prices, the net effect on growth ought to be moderate and concentrated in the middle two quarters of the year. This assessment is based on the presence of various support factors for economic activity, such as healthy labour markets, high household savings rates, low levels of private sector debt, and the ability of fiscal policy to offset part of the negative effects of the supply shock. Nevertheless, all this will depend on the swift reopening of the Strait of Hormuz, as the imbalance between supply and demand in energy markets is currently being covered by a daily reduction in stocks. If the crisis were to drag on, it could lead to issues with physical deliveries in some market segments during the summer months.
Putting numbers to the scenario, we have revised the global economic growth forecast downwards from 3.3% to 3.0% in 2026, with reductions in growth for the euro area from 1.3% to 0.7% (from 2.4% to 2.1% in the case of Spain) and for the US from 2.6% to 2.1%. To update the forecasts, we have used average oil prices for 2026 (90 dollars per barrel) and 2027 (80 dollars per barrel), in line with what futures markets are pricing in. This would mean a gradual return to normality for energy markets in the coming quarters, albeit with equilibrium crude prices almost 20 dollars higher than those prior to the conflict and a smaller buffer of stocks. If these assumptions hold true, growth could return to its potential levels by the end of 2026, and inflation could resume its path towards central banks’ targets in 2027 following this year’s spike (3.1% in the euro area and 3.5% in the US).
Right now, while we await growth data for the second quarter, some signs of a slowdown are beginning to emerge. However, these are also partially offset by purchases being brought forward amid the risk of potential disruptions and future price increases. The most valuable information is found in the inflation data, where in Europe the year-on-year rate has risen to 3.2%, accompanied by an increase in the core rate to 2.5%. This is largely explained by the acceleration of inflation in services (+0.5 pps, to 3.5%), the highest in over a year in Europe. It is now the turn of central banks and, following the old adage that prevention is better than cure, we will see moderate interest rate hikes in the coming months in a bid to evade the risks of second-round effects and their potential impact on inflation expectations. In Europe, in a scenario with significant (but not severe) direct inflationary effects and limited contagion to the rest of the consumer basket, a total increase of 50 bps might suffice, starting with 25 points in June. So by the time you read this, official rates in Europe will probably already have reached 2.25%. The situation is more challenging for the Fed, not only because of the complications introduced by a dual mandate (focused on both inflation and employment) during a supply shock, but also due to the lack of clarity regarding the strategic shift planned by the new chair (Kevin Warsh), when it is well known that it is not advisable to make changes during times of trouble. Moreover, monetary and exchange rate credibility often takes a long time to establish, but it can be lost very quickly.
