Middle East crisis: growth, inflation and monetary policy
March 19, 2026
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12 min
I'm pleased to be here to discuss the energy crisis, the conflict in the Middle East, and its likely consequences on inflation, economic growth, monetary policy, and asset allocation.
If you look at the current situation and energy prices, there are consequences on economic growth and inflation. First, by looking at gas prices, the shock doesn't resemble what we saw in ‘22. Therefore, comparing ‘22 to now is not the right way to analyse the situation.
While gas prices have increased significantly since the beginning of the Middle East conflict, you cannot compare this to what happened in 2022 after Russia's invasion of Ukraine.
Looking at the top left and top right charts, the blue line shows the year-end growth rate has previously reached 50-60% during the winter of 2025.
Having said that, we are now familiar with oil prices. Both WTI and Brent prices have increased substantially, reaching levels not seen since 2022. WTI and Brent are close to $100 per barrel, which triggers an increase in implied volatility of oil prices. This context reflects tensions regarding inflation risk and growth risk globally.
The key question is what drives these oil prices to stay around $100 per barrel.
Looking at market expectations for oil prices over the next 12 quarters, both from the market and investment perspectives, oil prices are expected to decline progressively toward a target of $80 per barrel by year-end. This scenario suggests a gradual normalization. This means the market isn't expecting inflation to derail given the magnitude of price increases.
The consequences should be limited in Europe and the US. Only 4% of oil exported from this region goes to Europe, and 3% to the United States. The consequences for Europe and the US will be limited in terms of the quantity of energy imported from this region.
However, oil exports from this region predominantly go to Asia. Asia is a major importer of oil from this region. China, India, Japan, and South Korea represent the largest importers. Clearly, the consequences for Asian countries will be more visible compared to Europe.
When we look at the energy mix in Asia, North America, and Europe, it's striking. North America and Europe clearly use natural gas and oil, while Asia uses more coal. This makes North America and Europe more vulnerable to price effects if energy prices remain at current levels.
Inflation risk is rising in this context. Specifically, in the US, energy risk could impact gasoline prices, and ultimately, gas prices. American households are sensitive to this, as gasoline prices have already increased by 20% since the beginning of the war.
A 20% increase in gasoline prices means a reduction in the purchasing power of US households. Private consumption is the key engine of US economic growth. Therefore, there are downward risks to economic growth if the crisis duration increases and no immediate solution is found to this conflict.
Given this energy shock and assumptions on oil prices, what are the likely inflation projections? We've calculated the likely year-end inflation rate for the Euro area and the US. Our assumption is that the barrel will stay at $80 on average.
The inflation rate by year-end in Europe could reach 2.9%, and in the US, inflation will exceed 3%, reaching 3.6%. We are far from the 2% inflation target. This means central banks should react to this inflation rate.
However, other parameters impact central bank decisions, including long-term market expectations on inflation risk. On the right side of this slide, we have market expectations for the US, and on the left for Europe.
There are similarities and differences. The similarity is that long-term inflation expectations are progressively declining and returning to their long-term driver for the US. In Europe, inflation expectations are also declining but not returning to the pre-conflict target the market expected. This explains why the market is more sensitive to the impact of energy prices in Europe compared to the US. We don't produce much energy in Europe, making European countries more affected by this energy shock.
This is important to bear in mind, and long-term interest rates reflect this. Long-term interest rates in both Europe and the US have increased since the beginning of the year. This increase is explained by the inflation premium, but also, and importantly, the real interest rate component is declining. This means growth expectations are being revised downwards.
Some analysts are talking about stagflation, but we are very far from that. We are not talking about stagflation. The risk of this increase in oil prices will impact economic activity, but the impact will be limited. We expect, if oil prices remain at $80 per barrel, a negative impact on European growth of 0.3 percentage points. If we expected 1.2% GDP growth for 2026, it would likely be 0.9%. This does not correspond to a recession or stagflation, where growth is muted with significant inflation pressures. We are not in that situation and see no reason to go there.
Regarding portfolios and asset allocation, we favour the US economy, which is more resilient than the European one in this scenario of energy shock and crisis. This is why we have decided to overweight the US equity market.
There's another parameter to consider regarding the US market: the valuation of the tech sector. The tech sector is clearly undervalued. Long-term historical data shows the tech sector is not as expensive as it was last year. This presents an entry point, given CapEx spending and the outlook for corporate earnings. We remain confident in this.
We also believe there is still value to be found in emerging markets, specifically Latin American countries benefiting from the energy situation. Emerging Asian countries are also exposed to the tech sector through semiconductors and robotization. We are convinced this sector will continue to deliver performance in the coming quarters and years.
