Iran War Delivers Dual Shock to Global Economy, Stifling Growth and Fueling Inflation
Business surveys from March have revealed the first synchronized shock to the world economy, demonstrating how the fallout from the Iran war is crippling growth momentum while simultaneously stoking inflationary pressures across multiple regions.
Widespread Economic Contraction
Multiple purchasing manager indexes compiled by S&P Global for March showed marked declines across advanced economies. Among the releases on Tuesday, the euro zone's composite measure dropped more than economists had predicted, Australia's equivalent gauge slumped to indicate a sudden contraction, and Indian factory activity slowed to its weakest pace since 2021.
The provisional results were gathered in the second half of March, capturing the mounting gloom among global businesses at the persistence of the Iran war and its mushrooming economic fallout. Collectively, these indexes offer an initial illustration of the reverberations on global prosperity from a conflict that has taken an immediate and crushing toll on energy supplies crucial to the functioning of some of the world's largest economies.
Inflationary Pressures Intensify
Several price readings surged dramatically, with input cost inflation in Germany, Europe's biggest economy, quickening to its fastest pace in more than three years. A similar gauge for U.K. manufacturing jumped the most since 1992, indicating significant inflationary pressures building across European economies.
The results on Tuesday don't yet include gauges from the United States, but of those published globally so far, every composite index of activity that combines both manufacturing and services shows notable declines. The list in chronological order encompasses Australia, Japan, India, France, Germany, the overall euro zone, and finally the United Kingdom as well.
Central Banks Respond with Hawkish Vigilance
Alarm at the economic consequences has already gripped policymakers worldwide. European Central Bank chief Christine Lagarde declared last week that the hostilities sparked by former U.S. President Donald Trump's attack on Iran have stoked upside risks for inflation and downside risks for economic growth.
Monetary officials both in Frankfurt and London have pivoted toward hawkish vigilance, with a euro-zone hike in interest rates possible as soon as next month. Peers in Japan are priming another move as early as April, while those in Australia have already delivered a second consecutive increase in response to the economic pressures.
Global Recovery in Jeopardy
Before the Iran war erupted, our global growth tracker suggested the world economy was gathering momentum, said Jamie Rush, director of global economics at Bloomberg Economics. The PMI figures emerging from advanced economies suggest that nascent recovery is in danger of being choked off by a combination of higher oil costs, tighter financial conditions and faltering sentiment.
While euro-area manufacturing activity unexpectedly improved, S&P Global's analysis cautioned that frontloading of stock-building by clients wary of supply disruptions may account for some of that temporary resilience. Combined with a near-stalling of services activity in the region, and a 10-month low for the composite measure, the overall picture remains bleak across global markets.
