Until when?

Overview

► Since negotiations between the United States and Iran were halted last week, the situation has shown no change. While one can certainly take some comfort in the fact that the war has not resumed, peace is, for the time being, not in sight. At the same time, for the global economy, the continued closure of the Strait of Hormuz, resulting from the Iranian and American deadlock, represents a very negative shock. This is reflected first and foremost in the price of a barrel of oil (Brent), which has returned well above 100 dollars. Moreover, signs of shortages of petroleum products are emerging in certain regions. Announcements by airlines suspending flights in order to save fuel are a striking example. In addition, tensions persist in the prices of other crucial raw materials, particularly for agriculture (fertilisers).

►As we have indicated since the beginning of this conflict, the magnitude of the shock and its duration are the key factors in determining its impact on the global economy. As the conflict approaches its second month, global growth is likely to be more affected than we initially anticipated. Nevertheless, the stabilisation of the Brent crude price around 100 dollars and, for Europe, of gas prices around 40 euros somewhat limits the scale of the shock. Obviously, a resumption of hostilities would very likely trigger a much more severe shock. However, we continue to assign a lower probability to this scenario, given the significant negative effects it would entail for both parties to the conflict.

►The prolongation of the crisis will weigh on economic growth and exacerbate inflationary pressures. A further deterioration in the economic outlook, without necessarily leading to a recession, could fairly quickly weigh on risk-taking, which has dominated market dynamics in recent weeks. While the energy sector could continue to prove resilient in equity markets, segments that have rebounded strongly, such as semiconductors, could come under pressure, even if only temporarily. In this new environment of heightened uncertainty, we are therefore adopting a tactically somewhat more cautious stance in the very short term.

►Central banks will be key players in managing this crisis. Our central scenario remains that most central bankers will adopt a very cautious stance. At this stage, in the major economies, the acceleration in inflation is mainly the result of the mechanical effect of rising energy prices, without giving rise to a broad-based spillover to other prices. As a result, market indicators continue to show that inflation expectations remain well anchored, that is, close to central banks’ targets. On the growth side, the impacts are not yet of a massive magnitude. Nevertheless, with almost all major central banks meeting this week, it will be crucial to analyse how they assess the situation.

►On the Fed side, the monetary policy committee meeting will be held under particular circumstances, as it is expected to be the last one chaired by Jerome Powell. Indeed, following the decision by the Department of Justice to drop the charges brought against him in connection with the renovation work at the Fed’s buildings in Washington, Republican Senator Thom Tillis—who had been blocking the nomination of Kevin Warsh—announced that he was prepared to vote in favour of Warsh’s confirmation at the head of the institution. As a result, J. Powell will step down from the presidency as early as May. A new chapter will therefore open at the Fed. Kevin Warsh, the new chair, will immediately come under close market scrutiny regarding his ability to assert the institution’s independence in the face of pressure from the U.S. president.

►The Bank of Japan (BoJ) has decided to leave its policy interest rates unchanged. Nevertheless, the vote within the board of governors was split, with three out of nine members voting in favour of a rate hike. This likely represents an important signal regarding the future direction of monetary policy. As expected, the BoJ highlighted the uncertainties linked to the war in the Middle East to justify its decision. However, it has indicated that it stands ready to raise rates should its economic forecasts materialise. Thus, barring a deterioration in the situation in Iran, we believe that the BoJ should resume the normalisation of its monetary policy as early as its June meeting.

►One of the key factors explaining the strong incentive for U.S. authorities to reach a rapid agreement with Iran and to normalise energy costs lies in the direct impact on American consumers. Indeed, the final April reading of the University of Michigan’s consumer confidence survey, while slightly higher than the preliminary estimate, remains at a historical low. The decisive factor continues to be rising inflation driven by higher energy prices. This deterioration in confidence can be directly linked to the decline in President Trump’s approval rating, which has fallen to its lowest level in polls since the beginning of his term.

►In the euro area, the rise in energy prices—particularly gas prices, as reflected in the PMI indicators—has significantly affected economic conditions. In particular, the positive effects of the German stimulus plan are largely being offset. This is the message conveyed by the IFO survey, which declined again in April, notably due to a sharp drop in expectations. These deteriorating economic outlook elements will very likely need to be taken into account by the ECB when shaping the future path of its monetary policy.