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<\/p>\n(Bloomberg) — The next four weeks will determine whether Europe\u2019s economy is facing a fresh crisis or simply a speed bump in its recovery.<\/p>\n
Most Read from Bloomberg<\/p>\n
That\u2019s how long Donald Trump says his strikes on Iran \u2014 which have already killed Ayatollah Ali Khamenei, triggered a wave of counter attacks across the Middle East and sent energy costs surging \u2014 will last.<\/p>\n
A lengthier campaign risks sabotaging the euro zone\u2019s fledgling revival while reawakening inflationary forces that the European Central Bank has fought hard to contain. A reliance on oil and gas from the region makes the bloc the \u201cmost exposed major economy\u201d to Iran spillovers, ING\u2019s Carsten Brzeski reckons.<\/p>\n
\u201cIf the conflict is short-lived and energy prices rise only briefly, the damage will be contained,\u201d Bloomberg Economics\u2019s Antonio Barroso and Simona Delle Chiaie said. \u201cA prolonged war, however, that keeps oil and gas prices elevated could force governments to spend more to shield voters from rising costs \u2014 and put incumbent leaders under pressure.\u201d<\/p>\n
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Things had been looking up for Europe this year, with higher government spending in Germany and beyond set to underpin further modest economic expansion and inflation broadly in line with the ECB\u2019s 2% goal.<\/p>\n
But the Iran escalation follows renewed confusion over US tariffs after the Supreme Court struck down Trump\u2019s initial levies.<\/p>\n
There\u2019s little panic just yet that the euro zone is being thrown off course. Holger Schmieding, chief economist at Berenberg, says he\u2019ll continue to base his outlook on Brent prices averaging $65-$70 a barrel, even after they broke through $80 on Monday in what he described as probably a \u201cnear-term spike.\u201d<\/p>\n
\u201cI\u2019d expect Trump to go to great lengths to prevent a lasting surge in energy prices that could hurt him at home,\u201d Schmieding said. \u201cUS voters already blamed him for high consumer prices before the strikes against Iran.\u201d<\/p>\n
Iran, too, has strong incentives to avoid excessive tensions in the Strait of Hormuz \u2014 the conduit for about a fifth of the world\u2019s seaborne oil and gas.<\/p>\n
\u201cChina \u2013 which, along with Russia, is the only major power supporting Iran \u2013 depends heavily on that sea route for its oil imports and will put pressure on Tehran not to jeopardize it,\u201d UniCredit economist Edoardo Campanella said.<\/p>\n
Story Continues <\/p>\n
What Bloomberg Economics Says…<\/p>\n
\u201cThe US-Israeli strike on Iran and Tehran\u2019s retaliation have already sent oil toward $80 a barrel, from a pre-escalation average of $65. It could top $100 if supply through the Strait of Hormuz is shut off. European gas prices have also moved higher, with risks to the upside if the conflict intensifies. Running these scenarios through our in-house economic model shows that CPI will be up and GDP down across major advanced economies, triggering conflicting impulses for central banks.\u201d<\/p>\n
\u2014Jamie Rush, Bj\u00f6rn van Roye and Ziad Daoud. Click here for full INSIGHT<\/p>\n
But while ECB policymakers Gabriel Makhlouf and Martin Kocher said it\u2019s premature to pass judgment on what this weekend\u2019s attacks mean for the economy, Belgium\u2019s Pierre Wunsch laid out what a prolonged war could mean.<\/p>\n
\u201cI would certainly not rush to react to any movements to energy prices,\u201d he said. But \u201cif it lasts longer, if the increase in energy prices is higher, then we will have to run our models and see what happens.\u201d<\/p>\n
Despite the likely hit to Europe\u2019s economy, the jump in commodity costs would still turn out to be net inflationary, Wunsch said. Indeed, traders now see a 25% chance that the ECB will hike rates by a quarter point this year.<\/p>\n
Chief Economist Philip Lane said that the ECB \u201cwill be closely monitoring developments.\u201d In an interview with the Financial Times he cited a prior scenario gamed out by central bank staff that showed \u201ca substantial spike in energy-driven inflation and a sharp drop in output\u201d caused by disruption to energy supplies stemming from a Middle East war.<\/p>\n
France\u2019s Francois Villeroy de Galhau called for cool heads.<\/p>\n
\u201cIt would be a mistake to rush into predicting a possible change in interest rates today,\u201d he said in Paris on Tuesday. \u201cI would remind you that we will not be making our decision based solely on current energy prices.\u201d<\/p>\n
Policymakers will still have a close eye on European gas prices, which is up more than 60% since Friday\u2019s close after Qatar halted production at the world\u2019s largest export facility due to Iranian attacks.<\/p>\n
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The timing is particularly unfortunate for Europe, where inventories are already unusually low, meaning the region will need to import large volumes of LNG this summer to refill its tanks before next winter.<\/p>\n
As a rule of thumb, a permanent shock to oil of $10 a barrel would lift euro-area inflation by 0.4 percentage points, Morgan Stanley estimates. Economic growth, meanwhile, would be 0.15 percentage points lower.<\/p>\n
The ECB\u2019s latest projections envisage consumer prices undershooting the target until 2028, with growth picking up to 1.4% next year from 1.2% in 2026.<\/p>\n
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For now, most don\u2019t see the upswing in oil as a permanent adjustment.<\/p>\n
\u201cInvestors are acting cautiously and are betting on a relatively short conflict,\u201d said Tobias Basse of NordLB. He highlighted that Germany\u2019s benchmark DAX index \u2014 currently at about 24,100 \u2014 \u201cremains focused on the psychologically important 25,000-point mark.\u201d<\/p>\n
Investment manager BlackRock has a similar view.<\/p>\n
\u201cMarkets and clients that we\u2019re speaking with are looking at this as a volatility shock and not as a supply shock, and there\u2019s an important distinction between the two,\u201d Karim Chedid, head of EMEA investment strategy, told Bloomberg Television. \u201cLargely speaking, it\u2019s not this seismic shock to inflation.\u201d<\/p>\n
–With assistance from Craig Stirling, Alexander Weber, Mark Schroers, Francine Lacqua, Samy Adghirni and James Regan.<\/p>\n
(Updates with Villeroy starting in 15th paragrapha)<\/p>\n
Most Read from Bloomberg Businessweek<\/p>\n
\u00a92026 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"(Bloomberg) — The next four weeks will determine whether Europe\u2019s economy is facing a fresh crisis or simply…\n","protected":false},"author":2,"featured_media":515765,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[257890,64,63,213770,1071,99,86425,2490,164,2057,120829,9564,257889,5575],"class_list":{"0":"post-515764","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-antonio-barroso","9":"tag-au","10":"tag-australia","11":"tag-ayatollah-ali-khamenei","12":"tag-bloomberg","13":"tag-business","14":"tag-chief-economist","15":"tag-donald-trump","16":"tag-economy","17":"tag-europe","18":"tag-europes-economy","19":"tag-european-central-bank","20":"tag-holger-schmieding","21":"tag-iran"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/515764","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=515764"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/515764\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/515765"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=515764"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=515764"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=515764"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}