Key points.
- In our baseline scenario, which assumes a limited rise in oil prices, the effects of the conflict should remain contained for all major economies.
- This baseline scenario would see a negligible rise in overall inflation and unemployment in the United States, as well as a slight slowdown in growth. Inflation in Europe and Asia would also increase only marginally.
- In a risk scenario, US and European growth would weaken. In the United States, interest rates would remain unchanged, and in Europe, inflation would exceed the target. For the Swiss economy, the effects would be more limited.
- A risky scenario would weaken many emerging markets and industrialized Asian economies; China might perform better, even if its growth would be affected.
We examine the consequences of the conflict in the Middle East for the global economy, both in our baseline scenario of a short-term conflict and in our risk scenario, involving lasting disruptions and a more pronounced impact on oil prices.
The effects of the war in the Middle East are rippling through economies and markets. Our base-case scenario remains one of a limited conflict, with a relatively contained and temporary rise in oil prices. We expect oil prices to increase by USD 10 per barrel, returning within six months to their previous range of USD 60-70 per barrel. This scenario is not expected to derail the global economy, and we have made only minor adjustments to our growth, inflation, and monetary policy forecasts.
We have made only slight adjustments to our growth, inflation and monetary policy forecasts.
Exposure to rising oil and gas prices varies across regions and countries. As net energy exporters, the United States and many Latin American economies are better protected, while Europe and Asia are net importers. Most euro area economies are heavily dependent on energy imports, and confidence and risk aversion tend to have significant repercussions on the economic and financial situation. Energy balances are particularly negative in the major industrialized and emerging economies of Asia, even though China has alternatives. It could, in particular, increase its coal and renewable energy production. In many emerging markets, substitution opportunities are greater than in Europe, but their oil reserves are also more limited; 30 to 50 days in some emerging markets, compared to around 90 days in Europe and 100 days in China.
We modeled two scenarios , along with their economic impact . In our baseline scenario of limited oil price increases, we anticipate a negligible rise in headline inflation and unemployment in the United States, along with a slight slowdown in growth. We have raised our projection for average US inflation by 0.1 percentage point to 2.6% and continue to forecast three interest rate cuts by the Federal Reserve (Fed) this year. The impact should also be contained in Europe, with headline inflation rising to just 2%, a level that would allow the European Central Bank to leave its rates unchanged. In developed Asia and emerging markets, we would see inflation rising by only 20 basis points and growth falling by 20 basis points, although with significant divergences between countries. Current oil prices also appear to reflect expectations of disruptions in oil markets lasting several weeks rather than several months.
China has solutions. In particular, it could increase its production of coal and renewable energy.
Quantification of the risk scenario
Our risk scenario models a protracted conflict, leading to an oil price increase of up to USD 50 per barrel, peaking at around USD 120 per barrel. This scenario resembles the oil shock that occurred during Russia’s invasion of Ukraine four years ago. Such a surge would have a stagflationary effect, leading to higher inflation and slower global growth. Our assumption for US real GDP growth would then be 1.2% for 2026, with inflation 1% above the target.
We believe the Federal Reserve (Fed) would disregard this rise in inflation, considering it temporary, and would keep its key interest rate unchanged. However, a sharper increase in unemployment, to 5.5% – a level higher than we expected – could prompt the Fed to begin a cycle of rate cuts.
In this scenario, the eurozone’s dependence on energy imports would pose significant risks to growth, and we would expect inflation to climb to nearly 2.8%. A weaker euro would exacerbate the inflation shock, while mitigating its negative impact on growth. Higher inflation would put the European Central Bank in a difficult position, increasing the risk of a monetary policy error should an interest rate hike be necessary amid an economic slowdown.
The eurozone’s dependence on energy imports would pose significant risks to growth, and we would expect inflation to climb to nearly 2.8%.
Even in a risk scenario, Switzerland’s lower dependence on gas imports, its currently low inflation, and the tendency of the Swiss franc to strengthen during crises would limit the risks to its economy. Key interest rates should remain unchanged. The threshold for raising rates to counter inflation—which would remain below target even in our risk scenario—or for lowering them into negative territory to support growth would be high.
Our risk scenario would have significant negative consequences for Japan and emerging markets, particularly in East Asia, India, Thailand, and Central and Eastern Europe. Australia, Brazil, and South Africa would be exceptions. The scope for monetary easing would be reduced in Indonesia, the Philippines, Poland, Turkey, and Mexico. Gulf economies appear vulnerable in a scenario that would permanently limit oil and gas exports.
Our risk scenario would have significant negative consequences for Japan and emerging markets.
China would likely fare better than its neighbors in our risk scenario. It has built up oil reserves and could also increase its reliance on alternative energy sources such as coal and renewables. Its access to Russian oil would potentially strengthen, and there are indications that Iran would be willing to allow Chinese-owned ships to transit the Strait of Hormuz . Furthermore, Chinese authorities have room to increase their support for the economy. However, in the event of prolonged disruptions in the strait and a risk scenario in which the price of oil rises by $50 per barrel, downward revisions to the growth outlook would be likely. At the time of writing, Brent crude is trading around $90 per barrel.
In summary, while the situation in the Middle East requires close monitoring, we continue to anticipate a short-term conflict with a brief and limited impact on energy prices. Accordingly, we maintain a moderate pro-risk bias in our portfolios, while remaining vigilant regarding future developments and ready to revise our positioning if necessary.
