The war widens the K a little further - Creand
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The war widens the K a little further

In the face of the Iran conflict, the daily deluge of breaking headlines and contradictory rhetoric from key players has created a climate of extreme volatility. With so many binary outcomes at play, economic forecasting (already a challenging task even in times of stability) has become virtually impossible. Still, there is little doubt that the global outlook has deteriorated since the conflict began.

The war has caused crude oil prices to surge, as the flow of oil through the Strait of Hormuz plummeted from the normal 20 million barrels per day — accounting for 20% of global maritime oil trade — to a mere trickle. The longer the Strait remains effectively closed, the more severe the impact will be on prices. Even if the US, Israel and Iran manage to reach a lasting agreement, oil prices will not return to the pre-conflict levels of $60 any time soon. The conflict has created an imbalance between supply and demand, ensuring elevated oil prices for the foreseeable future.

On the supply side, several production sites have suffered significant damage and restarting operations, where possible, will take two to four weeks. Additionally, countries like Saudi Arabia and the United Arab Emirates are reluctant to pay Iran transit fees for using the Strait of Hormuz. While pipelines provide a way to circumvent the Strait, they can only handle limited volumes, meaning oil shipments will still fall short of normal levels. On the demand side, not only will strategic reserves need to be replenished, but more countries will seek to build up their own reserves, given the heightened geopolitical risk. Lower supply and higher demand inevitably mean higher oil prices, compounded by an increased risk premium due to ongoing tensions.

The outlook for gas prices is even more severe. Restarting gas production sites takes two to four months, and facilities in Qatar destroyed by Iranian missiles will require years to rebuild. This poses a greater challenge for Europe, which imports 70% of its gas, compared to the US, which is a net exporter.

This month we have seen the first set of hard data reflecting the impact of the conflict. US headline inflation rose to an annual rate of 3.3% in March, up from 2.4% the previous month. This is particularly troubling for lower-income consumers, who are still recovering from the post-pandemic surge and the energy crisis triggered by the Ukraine-Russia war. Unlike these previous episodes, governments are now less able, and less willing, to provide the same level of financial support or subsidies to cushion the blow. According to the University of Michigan Consumer Sentiment Index, US consumers are more pessimistic than at any point in nearly 80 years of polling (even more so than during the COVID-19 pandemic) despite many economic indicators remaining robust.

Purchasing Managers’ Indexes (PMIs) for March show the global economy clearly slowing under the weight of the Middle East conflict. The composite PMIs for both the Euro Area and the US dropped to ten-month lows, although both remained just above the 50 mark that separates expansion from contraction. Rising input costs and renewed geopolitical risks are taking their toll, and the longer oil prices remain elevated, the greater the risk of broader price pressures as companies pass on higher energy costs.

Central banks now face a difficult dilemma. On the one hand, they want to avoid repeating the post-pandemic mistakes, when they underestimated inflationary pressures and acted too late. On the other hand, with the economy slowing, raising interest rates could further suppress growth. In this context, lower-income consumers will bear the brunt, especially as real income growth slows, thereby accentuating the lower branch of the K-shaped economy, while overall economic growth will continue to be supported by ongoing investments in AI, infrastructure, and defence. And so, the K widens a little further!

Date of report: April 20th 2026

Article published in Citywire on April the 21st 2026

Written by
Autor post
Jadwiga Kitovitz, CFA
Head of Multi-Asset Management and Institutional Accounts Creand Asset Management Andorra