Since the outbreak of the conflict in the Middle East on 28 February, energy markets have experienced increased volatility, with a marked rise in oil and gas prices. However, our analysis indicates that the impact on advanced economies is likely to be moderate, provided that the blockade of the Strait of Hormuz does not drag on. What mechanisms are at work and what risks have been identified?
Hello everyone and welcome to this new episode of Macro Waves, the podcast from BNP Paribas
To analyse the consequences of the current energy shock triggered by the conflict in the Middle East on advanced economies, I am joined today by Lucie Barette, our Europe economist covering Germany, Italy and Spain, and Marianne Mueller, our Europe economist covering the UK, Greece and Portugal.
Hello to you both.
Lucie Barette and Marianne Mueller:
Hello Alicia
Alicia Zabroski:
Lucie, the consequences of the current conflict in the Middle East are often likened to those of the conflict in Ukraine. Can you explain why?
Lucie Barette:
The two crises are often compared due to their origins in energy supply constraints. In 2022, these constraints were driven by Europe’s desire to move away from Russian energy, particularly gas, the scarcity of which has also hampered electricity generation. Currently, these constraints are driven by falling exports from the Gulf states, with a more significant impact on oil.
Alicia Zabroski:
Nonetheless, there are major differences between these two shocks; can you explain what they are?
Lucie Barette:
Of course.
In 2022, the increase in hydrocarbon prices was preceded by major shortages affecting various sectors, including semiconductors and plastics, which in turn affected industrial and food prices.
Moreover, demand is currently weaker compared to the time when it was elevated due to the recovery from the Covid crisis. This therefore limits inflationary pressures.
Alicia Zabroski:
While inflationary pressures are less pronounced today than they were back then, a shock to hydrocarbon prices still has an impact on inflation, doesn’t it, Marianne?
Marianne Mueller:
Yes. The shock to hydrocarbon prices has an immediate impact on inflation through fuel prices.
Nevertheless, for the time being, the inflationary shock of 2026 is largely confined to that. It is less widespread than in 2022, and no significant rise in underlying inflation has been observed thus far. Furthermore, wages have been on a downward trend in recent months, which is a significant factor in dampening inflation.
Alicia Zabroski:
Lucie, can you explain how this shock is affecting households and businesses in Europe?
Lucie Barette:
The inflationary shock of 2026 could, as in 2022, adversely affect household consumption, as an increase in energy prices automatically reduces their purchasing power.
As for businesses, production costs are expected to rise, especially in sectors that are heavily reliant on energy, such as heavy industry, including mining, metallurgy, chemicals as well as construction.
Alicia Zabroski:
Marianne, are the risks of shortages similar to those seen in 2022?
Marianne Mueller:
The closure of the Strait of Hormuz has resulted in a considerable disparity between global supply and demand for oil (both crude and refined) and LNG. In the month following this closure, the decision to release some of the stockpiles into the market, along with the arrival in port of shipments that had set sail prior to the closure, helped to mitigate the risks. However, stocks are limited, and these shipments have now arrived. The increase in production observed in other countries, coupled with a slight decline in consumption by China, is also limiting the extent of this disparity. However, it is evident that a peace agreement that includes reopening the Strait and repairing oil and gas infrastructure is essential to mitigate this risk. This situation also affects Europe, which has, incidentally, reduced its refining capacity in recent years, thereby increasing its dependence on imports of refined petroleum products from Asia.
Alicia Zabroski:
In this context, what responses are governments providing, given current budgetary constraints? This is the focus of our discussion now.
Lucie, the support packages introduced in 2022 accounted for 2.2% of GDP in Europe. What is the current situation, given that the significant increase in public debt levels and interest rates?”
Lucie Barette:
Fiscal room for manoeuvre has indeed narrowed. As you mentioned, this is because public debt is higher than it was back then and long-term interest rates have risen significantly compared to those seen in 2022. All this is happening against a backdrop of initially more moderate inflation.
In Europe, the response is significantly less costly than in 2022. Most countries are focusing on fiscal or regulatory measures aimed at fuel and electricity prices.
Spain exhibits the highest fiscal response as a percentage of GDP, at 0.3%.
Alicia Zabroski:
What about the UK, the US and Japan, Marianne?
Marianne Mueller:
In the UK, the current response is markedly different from that of 2022 in terms of scale. Support is limited to a fund of around GBP 53 million, which equates to just 0.002% of GDP.
In the United States, the response is focused on energy supply. The authorities have facilitated the domestic transport of hydrocarbons. They have also adopted a more flexible approach to sanctions against oil-producing countries.
Finally, Japan stands out for a more proactive approach, which includes a larger release of oil reserves than in other countries and subsidies aimed at stabilising prices.
Alicia Zabroski:
How are central banks reacting to this inflationary shock? Is an increase in key interest rates likely?
Marianne Mueller:
The information available at the time of recording this podcast, on 2 June, indicates a trend of slowing growth and rising inflation, albeit to varying degrees. In our view, the ECB has the strongest bias towards monetary tightening: its key interest rate is expected to rise from 2026, with two increments of 25 basis points each this year, ultimately elevating the deposit rate to 2.5%. In Japan, the process of monetary tightening commenced in 2024. It has been very gradual, with the key rate currently at just 0.75%. While it could accelerate somewhat, the increase will remain gradual, reaching 2% by the end of 2027, despite a more hawkish-than-expected revision to its forecasts. The Bank of England is also expected to raise its interest rate by 50 basis points in 2026, bringing it to 4.25%. Finally, of the four central banks, the Fed is the least inclined to raise rates. The market indicates a significant probability of a rate hike before the end of 2026. However, the appointment of Kevin Warsh, who has frequently expressed dovish views, as the head of the FOMC will require close observation.
Alicia Zabroski: Let’s now look at the scenarios and outlook for 2026–2027. What scenarios do you envisage for the coming months, depending on how the conflict develops?
Lucie, what is the baseline scenario adopted by BNP Paribas’ Economic Research for oil price movements and their economic repercussions?
Lucie Barette:
Our baseline scenario assumes a partial resumption of oil flows by the end of the second quarter of 2026. There is currently a risk that the disruption to these flows could last a few more weeks. However, once they resume, oil prices are expected to fall but remain persistently high, at $10 to $15 above pre-conflict levels even by the end of 2027. In this scenario, the impact on growth would be moderate, mainly due to sluggish household consumption, resulting in a GDP loss of 0.25 percentage points in 2026.
Alicia Zabroski:
And if the conflict were to escalate, what would be the impact on advanced economies?
Lucie Barette:
Our most pessimistic scenario envisages a prolonged blockade of the Strait of Hormuz until October 2026, causing oil prices to rise above their May peak. In this case, inflation would increase, the risk of shortages would be more pronounced, and avoiding a recession would be difficult, particularly in Europe where fiscal room for manoeuvre is limited.
Alicia Zabroski:
Marianne, without going that far, could this current period of high oil prices paradoxically accelerate the energy transition in Europe?
Marianne Mueller:
A sustained increase in hydrocarbon prices most certainly could accelerate the electrification of energy use. This was precisely the outcome of the 2022 crisis. Europe has since moved towards one of the world’s lowest-carbon electricity mixes, with about 71% renewables and nuclear in 2025. But the share of electricity in total energy consumption remains low, at only 21% in 2024. National initiatives, such as France’s announcement regarding the energy renovation of buildings and the electrification of transport, could reinforce this trend, as such support helps to reduce the costs of electrification, which would otherwise be too expensive for households and businesses.
Alicia Zabroski:
The conflict in the Middle East is creating tensions in the energy markets. According to our baseline scenario, its impact on advanced economies is not characterised by shortages of the same level of demand growth as seen in 2022. However, a prolongation and/or escalation of the conflict could increase the risk of stagflation, particularly in a context where governments have limited room for manoeuvre.
This crisis once again highlights the dependence of advanced economies on carbon-based energy sources and the need to reduce it.
Thank you, Lucie Barette and Marianne Mueller, for your analysis.
Lucie Barette and Marianne Mueller:
Thank you, Alicia.
Alicia Zabroski:
To explore these topics further, I invite you to check out the “energy shock” Eco Charts as well as our April EcoInsight on the war in the Middle East and its impact on advanced economies. The links are in the description.
We’ll be back very soon with the next edition of Macro Waves.
Reading advices:
Energy shock: Dashboard 2026 vs. 2022 – 19/05/2026
Middle East Conflict: Moderate Impact on Advanced Economies So Far, but High Uncertainty Remains – 04/24/2026
