The United States is facing simultaneous pressure on growth and inflation. Measures of inflation based on the Personal Consumption Expenditures Price Index remain stubbornly elevated, while rising energy costs are beginning to weigh on both consumer spending and corporate margins.

For now, we are not increasing our probability estimate of a US recession or stagflation in 2026, which remains at 20%.

A short-term spike in energy prices can still be absorbed by the economy, particularly if households temporarily reduce their savings rate to sustain spending.

However, the margin for adjustment is narrowing. It would not take a significant additional shock for those recession or stagflation probabilities to begin rising.

From a market perspective, the timeline is tightening: the Middle East supply situation could become critical within a matter of weeks if current pressures persist.

Macro cycle (from positive to moderately positive)

Recent developments surrounding the Iran crisis have led us to slightly temper our macroeconomic outlook. Although fundamental economic data have remained broadly positive in recent weeks, the overall outlook has weakened somewhat. Coordinated strikes by the United States and Israel against Iran, followed by Iran’s retaliation, have pushed global energy prices higher. The recent surge in oil prices—Brent and WTI crude both moving above $100 per barrel—has increased the risk of a meaningful negative impact on global growth and inflation.

While the United States is now better insulated from energy price shocks than during previous energy crises, rising inflation expectations reduce the likelihood of the two Federal Reserve rate cuts that financial markets had previously priced in for this year. A similar dynamic is visible in the Eurozone, but to an even greater extent: market expectations have shifted toward fully pricing in an ECB rate hike this year. Higher energy prices effectively act as a tax on consumers, transferring income to energy producers. This dynamic ultimately weighs on economic growth while adding upward pressure to inflation.

For the time being, we still believe the US administration under President Trump has strong incentives to bring the conflict with Iran to an end—sooner rather than later. Persistently elevated energy prices could erode voter support for the Republican Party and President Trump ahead of the midterm elections in November, now just eight months away. Nevertheless, uncertainty surrounding the evolution of the crisis and its potential impact on energy markets has increased significantly.

Overall, while we still expect a global environment characterised by positive growth and moderate inflation—including in major financial market economies such as the United States, the Eurozone, Japan, and the United Kingdom—the outlook has become somewhat less favourable since the escalation of the Iran crisis. As a result, we are downgrading our macro pillar assessment by one notch, from positive to moderately positive.