How does the war in Iran affect economic and financial outlooks?  

The war in Iran marks a turning point that abruptly disrupts an economic and financial momentum that had been highly favorable since the beginning of the year. Xavier Charpard, Strategist at LBP AM, analyzes this historic shock in our new “Market Views” video.

The surge in energy prices — more than 50% for oil and gas — and the blockade of the Strait of Hormuz, through which 20% of the world’s oil and liquefied natural gas transit, have created an unprecedented shock in modern economic history. In this environment, one central question emerges: “What scenario lies ahead?”

A rising downside risk

The likelihood of a more negative environment is increasing. If disruptions in the Strait of Hormuz persist, the energy shock could intensify and, more importantly, last for several months.
Such conditions would generate a major stagflationary impact:

• Europe and Asia: risk of recession by mid‑year.
• United States: sharp economic slowdown, amplified by persistent inflation and limited fiscal room for maneuver.

At this stage, we estimate the probability of this unfavorable scenario at around 25%.

A more constructive central scenario

Despite the uncertainties, the most likely medium‑term scenario remains more positive. Several political and economic factors support the prospect of gradual normalization:
On the U.S. side

• Rising political pressure to limit escalation and shorten the conflict.
• Weak public support for a prolonged war, especially among the president’s voter base.
• The surge in gasoline prices is becoming a critical issue ahead of the midterm elections.
• The White House may seek to stabilize the situation before President Trump’s upcoming visit to China, scheduled for late March/early April.

On the Iranian and regional side

• Iran depends heavily on oil revenues, which rely on traffic through the Strait of Hormuz.
• China, a key energy partner for Tehran, has a strong interest in a rapid stabilization.

This leads us to expect heightened tensions in the coming weeks, followed by a likely easing in the spring, enabling uncertainty and energy prices to normalize before summer.

Economic impact in this central scenario

Assuming tensions gradually ease:
 

Global Growth

• Slightly weaker, but overall resilience would remain intact.
• Inflation somewhat higher, though temporary.

Eurozone

• Growth stable in the first half of the year, expected to remain above 1% in 2026.
• Inflation slightly above 2% this year before falling below target next year.

Monetary Policy

• Central banks are likely to remain cautious as long as the duration of the shock is uncertain.
• Over a longer horizon:
  • ECB: rates likely to remain stable.
  • Federal Reserve: a final rate cut remains possible this summer.

Market outlook

Equities: caution in the short term, potential in the medium term

In the very short term, volatility and caution prevail.
The recent market decline reflects a reduction in investor positioning since January rather than a collapse in risk appetite.
Over the medium term, however, the outlook is more optimistic:

• Equity valuations have become more reasonable after the pullback at the end of February.
• In the central scenario, corporate earnings growth is expected to resume, supporting an attractive performance potential.

Fixed Income

Sovereign bonds already offer compelling opportunities, particularly in Europe:

The recent rise in yields reflects both inflation risks and the possibility of ECB rate hikes this year.
In the central scenario, a decline in energy prices and stable policy rates should ease pressure on short‑term yields.
If the energy shock were to intensify temporarily, long‑term yields could begin to reflect weaker economic activity risks rather than inflation.

However, caution remains warranted on very long maturities, given deteriorating fiscal outlooks.
 

The views expressed (i) are considered reliable by LBP AM and based on or justified by prevailing economic, financial, market, and regulatory conditions, and (ii) are provided for information purposes only.