Report by Pablo Duarte
The market is faced with a robust US economy and a weak eurozone: inflation is rebounding, driven by energy prices, whilst geopolitical risks are mounting. At the same time, expectations regarding interest rates are increasingly diverging, and global growth forecasts have been revised downwards.
The global economy is reeling, energy costs remain sky-high, the war in Iran is driving up transport costs and fuelling serious fears of stagflation.
The trigger seems quite clear: the Strait of Hormuz is blocked.
Historically, Americans had always spent a much larger proportion of their income on energy than Europeans. It was almost an unwritten law, but this has now changed completely. In Germany, energy costs already account for around 5% of total household budgets. It is as if the state were to start withdrawing 5% from citizens’ bank accounts every month – a sort of permanent and unpredictable ‘crisis tax’. The most likely outcome would be that consumers would stop going to restaurants or buying new clothes.
When an increasing proportion of money must be spent on paying for more expensive energy, that money no longer reaches domestic consumption. This greatly weakens the economy. At the same time, these higher energy costs end up being passed on to virtually all end products. And that directly fuels the next major problem: inflation.
In recent months we have seen inflation rates of 3.8% in the United States and 3% in the eurozone, with energy as the main driver behind price rises. Faced with this, central banks are reacting with extreme severity: in the case of the US Federal Reserve, interest rate cuts are no longer expected until the end of 2026. And in the eurozone, further rate hikes of between 50 and 75 basis points are even being priced in. In other words, borrowing will continue to become more expensive.
But this raises an important question, because at first glance this seems contradictory. The markets seem to be telling us: “Don’t worry, this shortage is just a temporary shock.” But then, why do central banks seem to be panicking and continue to tighten their monetary policy if the problem is supposedly going to disappear soon?
The reason is that there is a deeply rooted fear of stagflation. Even if the markets are right and oil prices fall again in six months’ time, these extremely high energy costs are already filtering through the global economy right now. Every haulier, every baker and every service provider has to raise prices to keep their business afloat. And the danger is that these price rises will end up becoming firmly entrenched in our expectations, as well as in contracts and wages. All this whilst economic growth stagnates because consumers are forced to save.
That toxic mix of economic stagnation and persistent inflation is precisely what central banks fear so much. That is why they need to show absolute determination, regardless of what the markets price in in the short term. All this uncertainty also has very specific social consequences. Take the United States, for example, even though it appears to be better protected against the direct energy shock. There, the household savings rate has already fallen to just 3.6%.
At the same time, energy costs have soared: they are 19% above November 2021 levels. When the daily cost of commuting to work rises so sharply, it directly affects everyone’s daily life. That is why, with the US mid-term elections approaching, this issue could prove highly damaging to Republican aspirations.
