What do we know at this stage? For now, we know that the surge in oil & gas prices following the war will result in an immediate and substantial spike in headline inflation, which will be detrimental to growth. Quantifying the damage is particularly tricky: beyond national specificities (eg, dependence on oil & gas, robustness or vulnerability of pre-war economies, safeguards), the damage will depend on how long the conflict lasts and how long the Strait of Hormuz remains closed. Based on a ‘reasonably conservative’ scenario, growth is expected to erode without collapsing. But a ‘reasonably conservative’ scenario does not assume a rapid ‘return to normal’, but only a gradual, partial reopening of the Strait of Hormuz, compounded by damage to oil & gas infrastructure that will keep oil & gas prices high.

In the US, despite the volatility of the Trump administration’s economic decisions, growth performance has held up and is expected to remain solid. While the US benefits from being a net energy exporter (rising oil prices may stimulate investment in the sector, particularly in infrastructure), this status does not make it immune to energy inflation, which adds to the pressures already fuelled by tariffs. YoY headline inflation could peak at around 3.6% in mid-2026 and average 3.2% in 2026 and 2.3% in 2027 (following 2.7% in 2025). To withstand this new wave of inflation (still moderate compared to the post-Covid shock), the economy will be able to rely on the favourable effects of fiscal policy, its reduced sensitivity to interest rates, a moderate cooling of the labour market, the sound financial health of households and, finally, robust non-residential investment driven by spending on AI. Despite pockets of vulnerability concentrated among low-income households and small businesses – unlikely to destabilise the economy as a whole – growth is projected to stand at 2.2% in 2026, down from the 2.5% previously forecast.

At the onset of the war in Ukraine, the Eurozone was exposed to a real risk of shortages which, at this stage, remains confined to adverse scenarios where physical constraints on production capacity prevail. However, the energy supply shock and its resulting inflationary impact, coupled with tighter financial conditions and growing uncertainty, are undermining our pre-war scenario of resilient domestic demand: acceleration in investment and steady consumption, driven by the gains in purchasing power embedded in our disinflation scenario, are now under threat. YoY inflation could, in fact, approach 3.7% in May 2026 and see its annual average hover around 3.1% in 2026 and 2.1% in 2027, matching the 2025 rate. Core inflation, which is more subject to inertia, would peak in May 2026 at 2.5% but would exceed the 2.0% target throughout the forecast horizon, averaging 2.3% in 2026 and 2027. 

Our scenario currently rules out a recession in favour of a substantial slowdown in growth which, after 1.5% in 2025, would reach only 0.8% in 2026, compared with the 1.2% previously forecast. Although hampered by the inflation shock and the expected monetary tightening, growth would nevertheless benefit from the solid economic and financial position of private agents, as well as from the broadly neutral and locally (particularly in Germany) expansionary stance of fiscal policy. In addition to the German stimulus (unchanged infrastructure and defence spending plans), 2026 will benefit from investment expenditures linked to the NGEU funds and to a general acceleration in defence effort.

In emerging markets, the shock caused by the conflict in the Middle East reveals and amplifies fragilities: a complex world characterised by pervasive vulnerabilities that vary in intensity. How well countries can absorb external shocks without triggering unmanageable macro-financial imbalances will be determined by a range of factors, including: (1) their status as a net oil & gas importer or exporter; (2) their external dependence on energy, trade, tourism and financing, including remittances; (3) inflationary dynamics, including sensitivity to volatile prices (eg, food & energy); (4) financial robustness (including fiscal and monetary leeway); and (4) political weaknesses. Thus, even in Asia – which imports 90% of the oil passing through the Strait of Hormuz – national trajectories will differ from country to country. As for China, it has the means to shield itself from headwinds as long as its exports – a key driver of growth at the start of this year – do not falter under the impact of global trade disruptions linked to the Iranian conflict. Despite the expected slowdown in net exports, growth is expected to reach 4.7% in 2026 after 5.0% in 2025.

In terms of monetary policy, to minimise the risk of an inflationary spiral and the de-anchoring of inflation expectations, central banks could take pre-emptive actions even if it means sacrificing growth. In the US, a scenario of monetary pause replaces the easing hoped for by the markets. In the Eurozone, an early and brief tightening replaces the previously anticipated stability of key interest rates. In the US, the upward revision of inflation forecasts does, in fact, reinforce (conveniently) our aggressive stance from the start of the year. The Fed is therefore expected to pause in 2026 (with the upper bound of the Fed Funds rate remaining unchanged at 3.75%); in 2027, as inflation slows more markedly, it would cut the rate to 3.50%. The ECB’s monetary tightening scenario assumes that, if rates need to be raised in the short term to anchor inflation expectations, it is better to act immediately and concentrate hikes over a short period. Our scenario therefore envisages hikes of 25bp each, with the first in April followed by at least two further hikes, in June and then in July. The ECB would end the year with a deposit rate of 2.75%, subject to upside risk, before embarking on modest easing (deposit rate at 2.50% by end-2027).

The new trajectory for key interest rates is accompanied, broadly speaking, by a scenario of modest rises in interest rates and a net, albeit temporary, flattening of the yield curve at the short end. In the US, as markets recalibrate their monetary outlook, both delaying and reducing the expected rate cuts by the Fed, the 10Y US Treasury yield is expected to reach 4.55% while the 2Y yield would stand around 3.85% by end-2026. In the Eurozone, German 2Y and 10Y yields are expected to reach 3.00% and 3.25% respectively by the end of the year. Concerns about growth or public deficits are likely to trigger a widening of sovereign spreads, exacerbated by specific factors such as energy sensitivity (Italy) or upcoming elections (France).

Finally, regarding FX, the conflict in the Middle East immediately led to a decline in risky assets and an appreciation of the USD. Faced with different shocks to terms of trade and prices, and with varying sensitivities to inflation risk, central banks will react differently. The ECB’s expected vigilance could thus support the EUR to a greater extent than previously anticipated.