Global Economic Overview – March 2026

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The conflict in the Middle East, together with the effective closure of the Strait of Hormuz has shut off 20% of the world's supply of crude oil and liquefied natural gas (LNG). As Chart 1 shows, traffic through the Strait has slowed to a trickle. So far, Brent crude prices hit a peak of $119.50 per barrel and spot UK gas prices to 180p per therm. As our recent notes have argued, we doubt the political capital of Donald Trump to maintain military action for much longer. Indeed peace talks seem to be underway, at least via backchannels and energy costs have eased. But lasting damage to energy facilities and any delay to reopening the Strait will likely limit further declines in oil and gas prices even once hostilities cease.

Chart 1: For now, the Strait of Hormuz is effectively closed



Source: BBC, IMF, Macrobond, Investec Economics

How should central banks respond? Surges in energy costs impact inflation via petrol and utility prices; firms passing on the increases in their costs to consumers; and (potentially) workers achieving higher pay increases, causing 'second round' effects as firms increase their prices again to cover higher labour costs. Such a chain of events results in 'inflation persistence'. At the same time, higher prices cut households' purchasing power in real terms (unless they receive compensating wage increases), slowing growth. The appropriate monetary policy reaction largely depends on the perception of the scale and the duration of the energy shock, simplified in Chart 2.

Chart 2: A simple central bank decision matrix…

 



Source: Financial Times, Investec Economics

Reactions in global interest rate markets have been nuanced. While expectations of policy rates have firmed, the extent of these shifts has varied considerably across jurisdictions (Chart 3). For example, the upward shift (27 Feb to 25 Mar) in the Swiss forward curve at end-2026 has been a relatively modest 43bps, moving from the possibility of an easing to 1-2 hikes. At the other end of the scale, UK markets had been factoring in two cuts and now discount 2-3 hikes, a rise of 110bps. Central bank policy responses will vary according to their forecasts of the inflationary impact of energy prices; the current monetary stance and whether (as per the Fed) there is a dual price stability/full employment mandate. But we stress that rate markets have been highly volatile, as events have unfolded and uncertainty has remained high.

Chart 3: Rate expectations have risen more in some jurisdictions than others

 



Source: Macrobond, Bloomberg, Investec Economics

The US dollar has also risen across the board (Chart 4). Against the euro, for example, it has appreciated by over two cents, to $1.1560, despite a smaller increase in US market interest rate expectations than that in the Euro area (+64bps vs +82bps by end-year). Indeed prospective interest rate differentials are not currently the key, or even a key driver of currency pairs and for now at least, the USD has resumed its traditional mantle of a safe haven currency. We note at the same time though, that other safe haven assets, in particular gold and silver, have continued to retrace from their recent peaks following surges in their prices during December and January.

Chart 4: The dollar rises but precious metal prices retrace

 



Source: Macrobond, Investec Economics

Our new forecasts reflect a scenario where the conflict ceases relatively promptly. Energy prices continue to ease back but struggle to return to pre-conflict levels given the various supply restrictions. The shape of the UK gas futures curve (Chart 5) is a good characterisation of this. In aggregate globally, inflation is pushed upwards and GDP growth downwards. Central banks (CBs) must assess their responses. We judge that some CBs such as the ECB will opt to raise rates, especially if they consider their monetary stance to be neutral or accommodative. Others with a restrictive stance (e.g. the Bank of England) may be better placed to avoid tightening policy if they take the view that the price shock will be relatively contained and short lived.

Chart 5: Our forecasts are based on a slow easing in energy costs, as in the UK gas curve 

 



Source: Bloomberg, Macrobond, Investec Economics

Whichever of these routes CBs opt for, taken overall, the trajectory of interest rates will be higher than the likely path of rates before the start of the conflict with Iran. This will add to the dampening effect on most economies of firmer oil and gas prices. As a result we have brought down our forecast for global GDP growth for this year to 3.0% from 3.3% previously and that for 2027 to 3.1% from 3.2%. We would emphasise the uncertainty of the global outlook and that the revisions to our forecasts would be considerably greater if the military action were to be prolonged or if an intensification of the war resulted in further damage to the region’s energy supply capability.

Chart 6: We have revised our global GDP forecast downwards, but only moderately

 



Source: Investec Economics

United States

As explained above, our forecasts are based on the assumption that President Trump does not have the political capital for a ‘forever war’, or even a conflict that runs for much longer. Indeed, we identify two factors that might force the President’s hand to reach a deal. The first is simple: the cost of the military action. The Pentagon told Congress that the first six days of war cost $11.3bn, implying ~$2bn per day. So far this has been funded by the existing defence budget, but this is not an unlimited pot, and soon Trump will have to return to Congress cap in hand. The White House is reportedly planning to seek $200bn in extra military funding. Republicans are considering pushing this through reconciliation to bypass the filibuster rule and thus the need for Democratic support, although this process does have limitations.

Chart 7: Trump’s path to secure extra funds for Iran conflict could run up against filibuster rule

 



Source: Investec Economics, Flourish, US Senate

To put the $200bn price tag into context, it is equivalent to two years’ worth of food stamp funding. That might not sit well with the American people, especially at a time where they are seeing their cost-of-living rise as a direct impact of the conflict, due to the increase in oil prices. Indeed, prices at the pump have already risen by 33% (Chart 8). The resulting impact on the President’s already falling approval rating, especially with midterms around the corner, might add some pressure on the President to back down, and thus is the second constraint we identify. For the most part, he still has the support from the MAGA base, although for the midterms it is swing voters that are of principal importance.

Chart 8: Americans are feeling the cost of the conflict at the pump

 



Source: Investec Economics, EIA, Macrobond

How consumers weather this financial shock of higher energy prices much depends on the extent and duration of the increase, as well as any indirect effects on wider prices. On the current oil curve, we estimate a lift to inflation of around 1%pt. However, in contrast with the UK, the average US consumer is heading into the potential crisis with fewer rainy-day resources than usual, due to a historically low saving rate (Chart 9). In his post announcement press conference, Chair Powell did concede that the rise in oil prices will hurt consumer spending, but that for the economy as a whole, there will be a slight offset due to oil companies becoming more profitable and potentially increasing drilling.

Chart 9: The average consumer does not have a huge financial buffer due to low saving rate

 



Source: Investec Economics, BEA, Macrobond

As such, we have only cut our 2026 GDP growth forecast by 0.2%pts to 2.2%, of which 0.1%pt is due to downward revisions to Q4 2025. For 2027 we are forecasting 2.0% (prior: 2.1%). We expect the hit to growth to be smaller in the US than in the Eurozone and the UK due to the US’s status as a net energy exporter (Chart 10), as well as its smaller exposure to world gas markets (Henry hub spot prices are up 1% MTD, compared to 68% for UK natural gas and 57% for Dutch TTF). In terms of what this all means for US interest rates, the picture is arguably a little more complicated in the US than some of its peers. Firstly there is the dual mandate: the hit to the economy threatens the ‘maximum employment’ side of the mandate.

Chart 10: The US benefits slightly from being a net energy exporter

 



Source: Investec Economics, Macrobond

There is also a political aspect to consider. Current Fed Chair Powell’s term ends in May, and he is set to be replaced by former Governor Kevin Warsh, assuming he is approved by the Senate in time. We imagine Warsh will be under considerable pressure from the President to cut rates immediately, whatever the backdrop. However, as we have stated previously, he is just one vote on the committee, and now it is looking more likely that Powell will be another – he has said he will stay on as a Governor at least until the DoJ investigation into him is complete. Taking the upside risks to inflation, the downside risks to the labour market, and political pressure into account, we think that the Fed will hold off from cutting this year, resuming interest rate reductions next.

Chart 11: Our base case is no Fed rate cut this year, but three 25bp cuts next

 



Source: Investec Economics, Macrobond

Assuming that this conflict is relatively short lived and energy prices move lower in the next few months, we see Treasury yields coming down from their currently elevated levels too. We think 10y yields could fall to 4.25% by Q2, and then fall further to 4.00% in 2027 as the Fed resumes rate cuts. Similarly, the dollar, which is currently supported by safe haven flows and improved terms of trade, will likely see this support unwind as the conflict comes to an end and higher energy prices dissipate. As such we see the dollar falling back against most major currencies from Q2 of this year. We pencil in $1.18 against the euro by end year (prior: $1.20), and $1.20 by end 2027, unchanged from our previous target. 

Chart 12: Support for USD set to unwind once the conflict ceases 

 



Source: Macrobond, Investec Economics

Eurozone

For the EU21 the war in Iran represents a renewed risk to the outlook with energy at the heart of it. Whilst energy imports from the Gulf are small - only 4% of gas comes from the region - the EU21 is still vulnerable given that fossil fuels represent 69% of its energy supply. The majority is imported, leaving it with a trade deficit on energy of 1½% GDP. In any case energy prices are determined globally. Some comfort can be taken from the fact that it is spring and demand lower. Also, despite the 63% rise in gas prices, it should be noted that at €51/Mwh they are significantly lower than 2022 levels. But with unusually low levels of storage and the need to restock ahead of winter, a long war could lead to pressures building. However this is not our base case. 

Chart 13: Spring demand conditions lessen gas impact, but storage is low

 



Source: Macrobond

Where this energy shock will manifest itself most clearly is inflation. Prior to the war the ECB’s and our own forecasts had been for a mild undershoot of the 2% inflation target over the next 18 months. However that view has been turned on its head given energy price moves. On the assumption that the conflict ends relatively soon we see inflation rising to 3.7% in May, but this is subject to significant uncertainty, both in terms of the conflict itself and second round price effects. As we learnt from the last few years, supply disruptions can show up in a variety of unexpected places. To put some scenarios around the current situation, the ECB sees HICP inflation rising to 4.2% in an adverse case and 6.3% in a severe one. 

Chart 14: HICP inflation set to rise, potentially much higher in a severe stress

 



Source: Macrobond, Investec, ECB Mach 2026 Macroeconomic projections

Such analysis underlines its view that it is no longer in a ‘good place’ with regard to inflation and that the policy bias is towards a tightening in policy to ward off the inflation threat. Notably the ECB’s baseline forecasts incorporated one hike, but given members deem the 11-Mar estimates to be already out of date and the likely path of inflation somewhere between that and the adverse case, the likelihood is that the ECB will feel the need to hike rates by more than just 25bps, particularly given that its broad view is that current policy is roughly neutral. We therefore believe that it will sanction a 25bp hike at the April and June meetings. However we do not see such levels persisting and expect the ECB to reduce rates back to 2% in 2027 as inflation pressures recede. 

Chart 15: Market pricing for ECB hikes looks excessive, we expect two

 



Source: Macrobond, Investec

As to the impact on growth, assuming that energy supply disruptions begin to ease over Q2 and uncertainty ebbs, we see mainly a modest impact on activity. Where the impact is likely to be felt most acutely is in those European countries with larger manufacturing sectors and in particular energy intensive sectors, where Germany stands outs. German energy intensive industrial output has been under pressure for some time and is still 20% below pre-Ukraine war levels. The rise in energy costs therefore risks delaying the manufacturing recovery that had been expected this year. Households face pressures too, although there have already been some proactive measures from the governments in Italy, Spain and Greece to ease the burden. 

Chart 16: Higher energy costs a renewed headwind to German industrial sector recovery

 



Source: Macrobond

These measures are limited in comparison to those undertaken in 2022/23, partly due to the fact that the energy price spike is smaller. That said higher energy prices and uncertainty will likely dampen consumption and investment, causing us to downgrade our growth forecast for 2026, albeit modestly. We now predict growth of 0.9% this year and 1.8% in 2027 (1.4% and 1.7% previously). But the situation remains uncertain, and the economic pain could be deeper. A more severe scenario published by the ECB, which assumes a prolonged conflict, points to the bloc being tipped into a technical recession over the summer, and the impact on GDP lasting into 2027 too. 

Chart 17: A modest downgrade to EU21 GDP in light of higher energy prices 

 



Source: Macrobond, Investec Economics 

Markets have been exceptionally volatile over this period, especially interest rates, where short-dated (2y) bonds and swaps are in excess of 70bps higher relative to 27-Feb levels. Sitting behind this have been concerns over inflation and a repricing in policy rates, where 100bps of ECB hikes were priced in for this year at one point. Despite this, FX moves have been relatively contained in comparison, with €:$ just 1.9% lower. Squaring the two, the implication is that FX markets are placing a lower weight on relative interest rates and more on demand for safe haven dollars and its terms of trade benefit from energy. Consequently, we have made relatively small changes to our FX forecasts where we now see EURUSD at $1.18 in Q4-26 ($1.20 prior). End ’27 is held at $1.20. 

Chart 18: Despite a relatively favourable move in rates, €:$ has fallen amidst USD strength

 



Source: Macrobond, Investec

United Kingdom

The Iran conflict has changed prospects for the UK economy. The most immediate impact is incurred via energy markets. A surge in oil and gas prices presents a major issue for the UK because together, despite a rising share of renewables and biofuel, these make up 74% of the UK’s total energy supply (Chart 19). In fact, this share is a little higher than in the early 2000s, a time when the UK was still a net energy exporter; now it is a net energy importer, to the tune of slightly less than 1% of GDP late last year (Chart 10). A partial mitigating factor is that the share of manufacturing in GDP is lower than in the US and the Eurozone, and with that, the level of energy intensity of GDP – the energy use per unit of output generated – is relatively low. Still, higher energy prices do hurt the UK. 

Chart 19: Fossil fuels still make up about three quarters of the UK’s total energy supply

 



Source: IEA, Macrobond, Investec Economics

Who bears the cost of an energy shock is not clear cut: households can be hurt by higher prices and/or fewer jobs and firms via lower profits. If the burden this creates threatens to be too large, the government may choose to step in and shift some of it to future taxpayers, funding fiscal assistance by extra government borrowing. Our assumption is that the conflict will prove fairly short-lived. If so, we think the implications will be material but temporary, being felt primarily via higher prices and costs as well as greater uncertainty prompting investment and hiring plans to be put on hold for a while. Our new GDP forecasts are +0.8% for ’26 and +1.8% for ’27, 0.4%pts lower and 0.1%pts higher than we had predicted in February.

Chart 20: We expect a weaker trajectory for UK GDP as a result of the Iran conflict

 



Source: ONS, Macrobond, Investec Economics

Even a relatively short-lived conflict though can have a longer-lasting impact on UK inflation, not least via natural gas prices. These directly affect utility bills, not just for gas but also for electricity, through the way the energy price cap is designed. This mechanism aims to calculate a fair price given hedging that utility firms should undertake. As such, it is a weighted average of gas price futures, not the current spot price, that feeds into utility bills, with a lag. Because damage to the Gulf’s LNG production capacity is material and cannot quickly be fixed, futures suggest gas prices will take much longer than oil prices to ease (Chart 21). This will mechanically add to UK utility bills from July.

Chart 21: Energy futures envisage a fairly swift fall in oil prices but a slower one in gas prices

 



As of 25th March 2026. Source: Bloomberg, Macrobond, Investec Economics 

But even so, our assumption is that gas prices and therefore utility bills required to cover providers’ costs, will not need to rise to anything like the peak levels of ’22. We therefore judge the government will choose not to cap utility bills, at least not for all households. The direct inflationary impact of the energy price surge via utility and petrol costs should therefore be felt in full. On top of that, there will also be indirect effects as energy is an important input in the production of other goods and services. Disappointing growth recently though leaves some spare capacity, so firms may absorb more of the cost rise in lower profits than in ’22. The billion-pound question is the extent to which there will be second-round effects too, if wages are bid up to compensate for high inflation, a cost rise…

Chart 22: The return to target inflation could be postponed until H2 2027 given the Iran conflict

 



Source: ONS, Macrobond, Investec Economics

…triggering a subsequent round of price rises. A weaker jobs market leaves the risk of that less than in ’22 though, and policy rates are still mildly restrictive. It is a close call, but with our inflation forecast, shown in Chart 22 (we now predict inflation to average 3.2% in ’26 and 2.3% in ’27), we think the Bank might hold off hiking rates, instead deeming it sufficient not to cut them this year as it had previously intended. From early ‘27, as on-target inflation comes into sight for later in the year, the MPC may resume rate cuts. Our end-year Bank rate forecasts are therefore 3.75% for ’26 and 3.00% for ’27. We hence view risks to market expectations for the UK Bank rate as tilted to the downside (Chart 23).

Chart 23: We expect the MPC to judge that not cutting rates until 2027 is enough of a response

 



Source: Macrobond, Bank of England, Investec Economics

Gilts have sold off more steeply since the start of the Iran conflict than government bonds in the Eurozone and the US (Chart 24). We suspect some of this is overdone, leaving scope for a correction. As far as GBP is concerned, it has weakened less than EUR with the energy price surge. In the near term though, we remain cautious on GBP’s prospects as Starmer and Reeves could yet be replaced by more left-wing Labour politicians once there is a resolution to the Iran conflict. GBP may balk at this. Our hunch though is that any replacement would act as centrist, helping GBP to then recover. By year-end ’26 and ‘27, we predict GBPUSD at $1.34 and $1.35 and EURGBP at 88p and 89p.

Chart 24: Gilts have sold off more steeply than elsewhere since pre-conflict, across the curve

 



Source: Macrobond, Investec Economics 

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