Stagflation risks stacking up as Iran war enters third month

• Oil prices remain elevated with Brent at $112/barrel; Citi's adverse scenario envisions $120 oil cutting global growth to 1.5-2% while lifting inflation near 5%
• Europe faces the sharpest stagflation impact with inflation nearing 3%, contracting business activity, and Germany facing a 34% chance of recession in Q2 (up from 12% in March)
• Asia, which typically receives 80% of Gulf oil exports and 90% of LNG shipments, is bearing the brunt of disruptions, while China remains an outlier with 5% Q1 growth supported by ample reserves
• The U.S. faces more of an inflation problem than growth concern, with consumer inflation expectations jumping to 4.7% in April from 3.8% in March, though gas prices remain below pre-war levels

Market Summary: Stagflation Risks Rise as Iran War Disrupts Global Energy

Key Developments:

Two months into the Iran conflict, the continued closure of the Strait of Hormuz has created the world's largest-ever energy supply disruption, raising serious stagflation concerns—a dangerous combination of slowing growth and high inflation.

Oil & Energy Impact:

• Brent crude trading around $112/barrel, up over 50% from pre-war levels
• Citi's adverse scenario projects Brent reaching $120 by year-end, cutting global growth to 1.5-2% while pushing inflation near 5%
• European and Asian gas prices have also surged
• Farmers face worst fertilizer crisis in four years; jet fuel shortages emerging

Regional Vulnerabilities:

Europe: Most exposed due to energy import reliance. Euro zone inflation approaching 3%, with contracting business activity and surging inflation expectations. Germany faces 34% recession probability in Q2 (up from 12% in March). UK and euro zone borrowing costs up 90 basis points since war began. European equity markets down 4-5%.

United States: Facing primarily an inflation problem rather than growth shock. Consumer inflation expectations jumped to 4.7% in April from 3.8% in March. However, U.S. gas prices below pre-war levels, and economy remains relatively strong.

Asia: Hardest hit region, typically receiving 80% of Gulf oil exports and 90% of LNG shipments. Foreign investors pulling capital; energy shortages emerging in South and Southeast Asia.

China Exception: Growing 5% in Q1, supported by ample oil reserves and diversified energy mix. Investors favoring Chinese battery and EV companies.

Market Outlook:

RBC BlueBay warns recession probability in Europe, UK, and parts of Asia higher than equity markets reflect, signaling potential further downside.