The conflict in Iran and resulting closure of the Strait of Hormuz and damage to energy infrastructure in the Middle East has dealt a shock to the world economy. The impact of the conflict on the energy sector has repercussions for economic growth around the world. Rabobank expects the impact on oil and gas prices to persist until mid-2027, leading to impacts on inflation and economic growth.
Global Economy: Inflation Shock Slows Economic Growth
Higher energy prices are expected to create a stagflationary shock, not entirely unlike that experienced as the world emerged from the pandemic in 2022, albeit with a different starting point. Rabobank’s baseline shows moderate effects on global economic growth provided central banks don’t raise rates quickly and that the energy shock doesn’t have too great an effect on confidence.
Despite the U.S.’s position as a net exporter of oil and gas, its domestic fuel prices remain closely linked to global oil markets. As a result, Rabobank’s model expects the rate of inflation to increase in 2026 and 2027 and the rate of growth to decline and remain lower in 2027.
The Eurozone is a net importer of energy, however, Rabobank’s models show that the impact of the energy shock on inflation and growth won’t be that much stronger than in the U.S. This could be because the U.S. economy is roughly 33 percent less energy efficient than Europe’s according to World Bank data. Still, the inflation rate is expected to rise and Rabobank has updated its forecasts.
Interest Rates
The energy shock and its expected impact on economic growth present central banks with a monetary policy challenge. While the shock may be temporary and macroeconomics principles traditionally advise against acting based on temporary conditions, the persistence of higher inflation after the pandemic made the European Central Bank somewhat less tolerant of increases that may otherwise appear temporary. Rabobank expects the ECB to raise rates at least once this year.
In the U.S., the Federal Reserve Bank has a similar dilemma. Increased tariff rates are still feeding into inflation rates and the U.S. economy is facing a second supply shock. The Fed will need to weigh the risk of higher inflation against that of weakened economic growth. The expected appointment of Kevin Warsh as the new Fed chair will likely influence the central bank’s course of action. Rabobank expects two rate cuts from the Fed this year.
Foreign Exchange
Energy security is playing an increasingly important role in currency movements. In the past, a rise in oil price would typically be accompanied by a weakening of the dollar and appreciation of cyclical currencies, the relationship has reversed in recent years.
Download the full report for more information about Rabobank’s current forecasts.
Report Author(s)
Elwin de Groot
Head of Macro Strategy
Stefan Koopman
Senior Market Economist
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