West Asia conflict triggers 'stagflation' risks for global economy; Europe, Asia to bear brunt: Fidelity Report

The effective closure of the Strait of Hormuz ever since the war broke out in West Asia has created a ‘stagflation risk’ for the global economy since the start of March, according to a report by Fidelity International. The report highlighted that the situation has now moved beyond mere market fears to actual supply constraints.

"The Strait of Hormuz being effectively closed since the start of March means that the mechanism has shifted from headline fear to physical constraint," the report said, underscoring the seriousness of the disruption. The report added that the continuous disruption in the Strait is likely to create a supply-side shock, and make the nations with higher inflation and weaker economic growth globally.

Europe and Asia are likely to face a greater impact

It noted that such a situation will lead to higher headline inflation via higher energy/commodity prices as well as negative growth via real income compression, margin pressure and tighter financial conditions. It further highlighted that the impact would vary across regions, with import-dependent economies expected to suffer more because of unfavourable trade conditions.

According to the report, Europe and Asia are also likely to face a greater impact, while the United States may remain relatively less affected, underscoring the risks for regions reliant on energy imports. The report also warned that the economic consequences could continue even after the conflict ends. It noted that the aftermath will not mean a complete return to normal, as oil prices are expected to retain a sustained premium in the near term, keeping pressure on global energy markets.

This outlook is consistent with its broader view of growing global fragmentation, which it describes as a medium-term scenario of “strategic fragmentation." On the policy note, the report indicated that governments and central banks also face problems if risks continue. It expects "a swift policy response focused on affordability ahead of the mid-term elections," particularly in major economies.

Disclaimer: WION takes utmost care to accurately and responsibly report ongoing conflicts in West Asia involving Israel, Iran, US, Gulf nations and non-state actors like Hezbollah, Hamas, Houthis, Islamic State, and others. Claims and counterclaims, disinformation and misinformation are being made online and offline. Given this context, WION cannot independently verify the authenticity of all statements, social media posts, photos and videos.