As expected, the European Central Bank raised its key interest rates by 25 basis points, bringing the deposit facility rate to 2.25%. This decision, taken unanimously, reflects the Governing Council's conviction that the persistence of the energy shock warrants a monetary policy response. The ECB revised its inflation outlook upward more significantly than its growth forecasts downward. It also updated its alternative scenarios relative to the central scenario (one more favorable, two adverse). Christine Lagarde emphasized that today's decision was "robust" across all scenarios.
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?In this new episode, Lucie Barette and Marianne Mueller analyse the consequences of the current energy shock triggered by the conflict in the Middle East on advanced economies
Out of the spotlight, Europe is quietly preparing to emerge from its post-pandemic underwater years like a nymph turns into a stunning dragonfly. The turmoil of the last year and a half has brought about “Europe’s moment” in more ways than is being recognized. Europe isn’t just emerging as the alternative safe haven of choice. It can count on five powerful boosters: rebounding industrial strength, established services dominance, tech acceleration, a governance sea-change, and favorable geopolitical winds.
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Despite the energy shock caused by the conflict in the Middle East and intensifying competition from China, Germany is set to accelerate its growth in 2026 and 2027, driven by massive investment efforts. Yet its reliance on traditional industries and high exposure to China pose structural challenges that will require heightened innovation efforts.
Latin America is not exposed to the risk of a disruption in hydrocarbon supplies due to the conflict in the Middle East. However, the rise in international energy prices is exerting pressure on the region’s public finances. In Brazil, Mexico and Colombia, fuel subsidies are increasing the risk of fiscal slippage; however, this risk is somewhat mitigated by the projected rise in oil-related fiscal revenues. In Chile and Peru, the lack of subsidies points to a significant inflationary impact that could result in a monetary tightening. This would increase the interest burden on public debt, but the moderate fiscal deficits in these countries should enable them to absorb the shock
It’s a major trend, one that can be observed all over the world: since the early 1970s, the average number of children per woman, the ‘fertility rate’, has been falling almost continuously.
The outperformance of US growth is underpinned by productivity gains that are significantly higher than those of the previous decade. This acceleration is due more to the spillover effects of past investments and post-pandemic changes (such as remote working) than to artificial intelligence (AI). The roll-out of AI is too recent for productivity gains to have already made their mark at the macroeconomic level. In the medium term, however, AI is expected to support the upward trend.
The Eurozone is experiencing rapid population ageing, which, at first glance, does not inspire much optimism regarding its growth prospects. However, the decline in its working-age population can be countered by effective migration policies (as seen in Italy and Spain), as well as by an increase in labour force participation rates. Furthermore, much will depend on a recovery in productivity, which experienced a sudden stop following the Covid-19 pandemic.
China’s rise is undermining major sectors of European industry. However, as the German economy illustrates most clearly, Europe is shifting, driven by investment cycles in defence, electrification and artificial intelligence. It is redirecting its exports and managing to maintain strong positions, particularly in high value-added services, where exports to China are trending upwards. Yet this repositioning remains fragile and could be hampered by the economic costs of the conflict in the Middle East. To consolidate its positions, Europe must accelerate the unification of its internal market and do more to strengthen its industrial policy. This is the aim of the ‘One Europe, One Market’ agenda.
Emerging Asian countries are particularly vulnerable to the energy shock caused by the conflict in the Middle East. Beyond supply issues, rising prices pose a significant risk to these countries, where domestic demand is a major driver of economic growth. To limit the impact, some Asian countries (notably India, Indonesia, Malaysia and Thailand) have opted to partially subsidise energy and fertilisers. The additional cost to their public finances is expected to remain manageable provided that the average crude oil price does not exceed USD 100 per barrel over the year. However, this subsidy policy poses risks to their public finances, particularly if external financing conditions tighten. Indonesia is the country most exposed to a rise in US long-term interest rates.
The energy shock is beginning to feed through into French inflation. In March and April, inflation was limited to refining activities and fuel prices. It is expected to affect more sectors in the second quarter, according to the European Commission’s survey on three-month selling price expectations. In France, the pass-through is expected to mainly affect intermediate goods in Q2. However, inflationary pressures on consumer goods and services or construction are expected to remain quite moderate. These factors are consistent with our scenario of a limited acceleration in French inflation and a moderate impact of the energy shock on growth.
Unsurprisingly, the Bank of Japan (BoJ), the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) opted to keep their policy rates unchanged at their meetings in April. However, beneath this shared decision lie subtle differences that enable us to categorize each central bank based on how ready they are for a rate hike in the near future. The ECB ranks first, followed closely by the BoJ and the BoE, with the Fed remaining apart. Although the current energy shock is a global phenomenon and of a stagflationary nature (leading to lower growth and higher inflation), the dilemma varies for each central bank
French growth was lower than expected in the first quarter, at 0% QoQ, mainly hampered by exceptional factors, mostly aeronautics deliveries and public investment. These factors explain why this figure is significantly lower than our nowcast and that of the Banque de France, which estimated that growth had reached 0.3% in Q1, based on production indicators in industry and services. This lead taken by production is reflected in a strongly positive contribution from changes in inventories (+0.8 percentage points), driven mainly by transport equipment.
The central banks of the world’s leading advanced economies met this week, and all decided to leave their policy rates unchanged despite significantly higher inflation prints and outlooks. In the words of Bank of England (BoE) Governor Andrew Bailey, these were “active holds”. They are not fully hawkish yet, but the hawks have made their dissent heard while still in the minority. But they are no longer in a pure passive “wait-and-see” mode. We expect hikes to come through in June, at least for the BoE, BoJ and ECB.
The economies of Central Europe have weathered several shocks since 2020, demonstrating remarkable resilience. In 2025, the US tariff shock had a limited impact on economic activity. In fact, regional growth even accelerated, driven by strong consumer spending. In 2026, the war in the Middle East is once again putting the region to the test, while its fiscal flexibility has been considerably reduced. Uncertainties over the duration of the war are casting a shadow over the economic outlook. In any case, Central Europe can count on four key strengths to weather this shock. Firstly, its direct exposure to risks associated with disruptions in energy and industrial material supplies remains limited
