"Bloomberg Economics": A Sharp Slowdown Awaits the Global Economy Amid Rising Effects of the Iran War

SadaNews - A fragile ceasefire in Iran has kept oil prices hovering below $100 per barrel, while markets assess the likelihood of peace or escalation. The baseline scenario at "Bloomberg Economics" represents a continued struggle of lesser intensity somewhere between these possibilities.

The impact on the global economy is reflected in slower growth at 2.9% in 2026, down from 3.4% last year. Global inflation, which is already accelerating, may peak around 4.2% in the fourth quarter, up from 3.1% at the end of last year.

We see that central banks will keep interest rates unchanged in the second quarter before resuming cuts. Additionally, we present a negative scenario where oil reaches $170, and a positive scenario where it drops to $65. For the global economy in 2026, the difference between the two exceeds a trillion dollars in GDP.

The Beginning of the Iran War's Impact on Global Growth

The index indicates that the war weighs on global growth. The global economy appears to have sharply slowed in March, after the United States and Israel launched a war with Iran. "Bloomberg Economics"’s global growth tracker indicates a sharp reversal, following strong momentum at the beginning of the year.

This tracker uses a machine learning algorithm to extract signals from data of 18 advanced and emerging economies. It provides an early reading of output, relying on business surveys just days after the end of the month.

Regarding inflation, early readings from Europe and our big data tracker for the United States show a sharp acceleration in price rises, with fuel costs being the main driver.

Global Growth Slows to Lowest Level Since COVID

The war's effect on growth is complex. Generally, high oil prices are good news for producers like the United States, Russia, and Saudi Arabia. However, that assumes their ability to deliver oil to markets, which is a problem for Saudi Arabia and other Gulf countries. Meanwhile, consumers like the European Union, China, and India are the ones paying the price.

In the baseline scenario, global growth slows to 2.9% in 2026 from 3.4% in 2025, the weakest since 2020. Spending on artificial intelligence is a positive factor that offsets the costs of war.

If the war escalates and oil prices rise, the hit to global growth deepens, with GDP expected to grow by only 2.2%. If the ceasefire holds and oil prices return to pre-war levels, our forecasts improve to 3.1%. The gap between the best and worst-case scenarios is slightly above a trillion dollars, approximately the annual output of Switzerland.

Global Inflation Likely to Rise with Iranian Oil Shock

High oil prices directly translate to gasoline costs, and indirectly boost logistics, plastics, fertilizers, and other consumer price inputs.

The early effects of the war are already evident. Consumer price index readings in Europe surged in March. Our big data index project for prices in the United States indicates an increase to about 3.3% from 2.4% in February.

In the baseline scenario, we see global inflation reaching 4.2% in the fourth quarter, up from 3.1% at the end of 2025.

In the escalation scenario, price increases peak at 5.4% in the fourth quarter, the highest since mid-2024. Meanwhile, in the ceasefire scenario, the increase reaches 3.7%, closer to a temporary wave within a declining inflation trajectory, rather than a break in the trend.

Central Banks Await the Oil Shock

The response of central banks to the Iran war shock will reflect the risk balance between inflation and employment, how concerned they are about inflation forecasts, and in some cases, political dynamics.

In the baseline scenario, the global interest rate stabilizes around 5% in the second quarter, before gradually dropping to 4.7% by year-end.

In the escalation scenario, a larger inflationary shock pushes the rate to 5.3% in the fourth quarter. In the ceasefire scenario, rate cuts continue, ending the year at 4.6%.

Among major economies: the Federal Reserve is likely to lean towards cutting interest rates, supported by stable core prices. The Bank of England may find itself forced to raise rates due to high inflation. The European Central Bank is likely to face pressure to tighten, but the response will be limited. For the Bank of Japan, the war presents an opportunity to continue gradually raising rates.

US Growth Reliant on AI and Oil

We expected the US economy to grow above its potential level in 2026, driven by investments in artificial intelligence and fiscal stimulus, with inflation approaching the Federal Reserve's 2% target. Then came the shock of the Iran war.

In the new baseline scenario, high oil prices reduce 2026 growth by 0.5 percentage points to 1.8%, aligning with the long-term trend. High gasoline prices and tightening financial conditions will exert pressure on activity.

This will be partially offset by higher tax revenues this year, increased investments from oil producers, and rising defense spending. The ceasefire on April 7 increases the chances of achieving above-trend growth in 2026 if it continues.

Inflation is expected to rise in the near term, before slowing in 2027 due to base effects. The Federal Reserve will keep the key interest rate unchanged until the unemployment rate reaches 4.8% in the fourth quarter of 2026, at which point we anticipate a 50 basis point cut, followed by an additional 75 basis points in 2027.

Eurozone Growth Slows Due to Energy and Tariffs

The outlook for the Eurozone is being reshaped due to rising commodity prices, increasing the pressures from high US tariffs that were already weighing on activity.

In the baseline scenario, which assumes oil prices around $105 per barrel in the second quarter of 2026 before dropping towards $85 by year-end, GDP growth slows to 0.7% in 2026 from 1.4% in 2025. This compares to a pre-war forecast of 1.0% for 2026. A drop in oil prices could support a recovery in growth to 1.0% in 2027. A permanent ceasefire would lead to an earlier recovery.

This commodity shock may push overall inflation to 2.9% in 2026 from 2.1% in 2025, before base effects push it down to 1.9% in 2027. Limited pass-through to core inflation would keep it low at 1.9% in both 2026 and 2027. In response, the European Central Bank may raise rates once by 25 basis points in June 2026.

UK Under Pressure from Stagflation and Energy

Before the outbreak of the Iran war, the UK was facing a tough mix of slow growth and inflation above target. High energy prices will exacerbate these trends, although the exact magnitude remains uncertain.

Assuming gas prices remain around £1.40 per therm in 2026, and that oil averages $105 per barrel in the second quarter of 2026 before dropping to about $85 in the fourth quarter, inflation is likely to hit 3.3% in the fourth quarter of 2026. This is 1.3 percentage points higher than the pre-war baseline scenario. GDP is likely to grow by only 0.5% this year. We believe that the Bank of England will keep rates unchanged in response, meaning that rates will end the year 50 basis points higher than pre-war forecasts.

The ceasefire between the US and Iran has shifted the balance of risks towards a more moderate outcome. In a scenario where energy costs return to pre-war levels by the fourth quarter of 2026, the peak in rising inflation would be 0.4 percentage points in the third quarter of 2026. This might reopen the door for the Bank of England to cut rates by the end of the year.

China's Growth Depends on Resilience of Global Demand

China has levers to absorb the shock of the Iran war, including oil reserves, the ability to curb rising prices, and secure energy from alternative sources. With general prices under downward pressure due to oversupply, it also has room to absorb the inflationary push.

However, an extended war would pose greater threats, as demand destruction in foreign markets and disrupted supply chains could harm exports, the main engine of growth.

A two-week ceasefire offers some relief, but risks remain high. Beijing is likely to enhance stimulus within limits, possibly through a combination of moderate financial support and interest rate cuts. In a scenario where the conflict shifts to a less intense level, which is the baseline scenario, stronger political support may achieve growth at the bottom of the government's target range of 4.5% to 5% for 2026. However, if it drags on with effects on global demand, the outlook would be more challenging.

Inflationary Pressures Push Japan to Raise Rates

Japan faces significant stagflationary inflationary pressures due to the Iran war. In the baseline scenario, high energy prices raise inflation to around 5% in early 2027. A decline in purchasing power will slow growth to 0.2% this year from 1.0% in 2025.

We expect the Bank of Japan to raise rates twice this year, in April and September, bringing the target interest rate to 1.25%, instead of a single hike in July in the pre-war baseline scenario.

The weak yen and strong wage growth contribute to inflation expectations. The Bank of Japan will be concerned that oil-driven price increases add an extra push. We believe it will stop at two hikes, considering the Takahichi administration's supportive stance on stimulus. However, bringing the second hike to September, faster than market expectations, would indicate its focus on price stability.

India's Growth Outlook Reduced Due to Energy Shock

The Iran war has pushed India, described as a moderately balanced economy, towards stagflation. In the baseline scenario, which assumes the average oil price reaches $90 for the fiscal year 2027 for India, we expect growth to be 5.9%, down from our pre-war estimate of 7.5%.

Higher fuel prices, a shortage of fertilizers and gas, rising yields, and declining stocks will press on growth. Outflows of capital, a drop in remittances, and export losses due to shipping disruptions will exacerbate the shock's impact. A continued ceasefire could bring us closer to a scenario of falling oil prices, raising growth to 7.3%.

In the baseline scenario, we see inflation at 4.6%, with gasoline prices remaining unchanged as oil companies and the government absorb losses. We expect the Reserve Bank of India to keep its policy unchanged for an extended period. If the collapse of the ceasefire deepens the energy shock, the high oil price scenario would push inflation to 6.7% and lead to a 50 basis point rate hike starting in the fourth quarter of 2026.

Saudi Arabia's Growth Resilient Supported by Oil Diversion

The Iran war strikes at a core pillar of the Saudi economy—oil. Despite heightened uncertainty, the baseline scenario points to a growth rate of 2.9% in 2026. This represents a slowdown compared to last year and is below consensus forecasts and the century's average. However, in the context of unprecedented regional conflict, the performance is deemed resilient.

The reason is simple: Oil still flows largely, and prices are much higher. The critical factor is a pipeline extending from east to the Red Sea that bypasses the Strait of Hormuz, allowing exports to continue despite the war.

While volumes may have dropped by about 30% since the conflict began, prices have risen more, likely boosting oil revenues. The main risk lies on the security side, as a collapse of the ceasefire and attacks on infrastructure in the Red Sea could harm exports, leading to higher oil prices but lower Saudi income.