Summary
Highlights
The war in Iran is causing significant problems for the global economy, including higher oil and gas prices, rising transport costs, and increasing inflation. Economic growth forecasts are being cut globally, and central banks that initially considered cutting interest rates are now debating increases. Despite talks of a potential peace agreement, uncertainty remains high, and much of the economic damage for 2026 has already occurred, raising concerns about a severe economic slowdown.
The UK economy contracted by 0.1% in April, marking a significant shift after earlier growth in February and March. This decline is attributed to reduced discretionary spending, with sports, amusement, and recreational activities falling by over 9%, indicating consumers are under pressure. The Office of National Statistics directly links rising fuel and energy costs due to the Middle East conflict to the economic slowdown. Europe is also experiencing economic challenges, with Germany cutting its growth forecast, France stagnating, and Italy downgrading its outlook. The European Central Bank expects only 0.8% growth in the Eurozone for 2026. China is also showing signs of weakening industrial production, retail sales, and investment activity due to higher energy costs and weaker global demand, highlighting the widespread economic impact of the conflict.
Inflation is accelerating globally. In the United States, inflation has reached 4.2%, its highest level in three years, more than double the target of 2% from the beginning of the year. Energy prices, especially gasoline, are major drivers, leading to real wages falling for the second consecutive month, meaning Americans are becoming poorer in real terms. The Eurozone faces a similar problem, with inflation climbing to 3.2% and core inflation also rising, signaling widespread economic inflation that is harder to control. Central banks, which were previously considering rate cuts, are now implementing rate increases. The European Central Bank raised rates by 25 basis points for the first time since 2023, with more increases possibly to come. Other countries like Indonesia, Norway, and Australia are also tightening their monetary policies. This shift towards higher interest rates is dangerous, as it increases borrowing costs, reduces consumer spending, slows business investment, and weakens housing markets, contributing to a slowing global economy.
The combination of rising inflation, weak growth, and potentially higher interest rates is leading economists to discuss stagflation, a difficult scenario for policymakers and painful for households and businesses. The war in Iran continues, with mixed signals from Donald Trump regarding peace negotiations and potential military operations, including targeting Kark Island, a key oil export hub. This uncertainty makes it difficult to predict a resolution. Even if a peace agreement were signed soon, the economic damage — higher business costs, increased fuel prices, and changed central bank policies — has already been done. Global expectations for 2026, which included lower inflation, lower interest rates, and improved growth, have been reversed. The UK's latest GDP figures confirm that the economic consequences of the war are moving from forecasts to reality, and if this trend persists, more countries could face weaker growth, further rate hikes, and even recession by the end of the year.