Macro Freestyle – Oil shock- Should we worry about inflation or growth?
The desk argues that the current oil shock, driven by escalating tensions in the Middle East, poses a dual threat of inflation and potential growth concerns. Per the full note from Standard Chartered, the immediate market reaction has been to price in inflation fears, with significant shifts in rate expectations across developed markets, particularly in the UK where rate hike probabilities surged from cuts to potential increases of over 100 basis points. As the situation evolves, the desk highlights that sustained high oil prices could trigger broader economic vulnerabilities, particularly if they remain elevated for an extended period.
What the desk is arguing
The desk frames this as a critical juncture where inflationary pressures from rising oil prices could overshadow growth prospects. Standard Chartered's analysis indicates that while markets are currently reacting to inflation, the longer-term implications for growth could be severe if high prices persist.
Evidence from the commentary shows that the UK rates market shifted dramatically from anticipating rate cuts to pricing in multiple hikes, reflecting a broader trend across developed and emerging markets. This volatility underscores the uncertainty surrounding energy supply and its impact on economic growth.
The alternative read would suggest that if oil prices stabilize below critical thresholds, the growth outlook might not deteriorate as sharply, but current trends indicate a heightened risk of recession if prices remain elevated.
Key takeaways
01Oil shock from Middle East tensions is driving inflation fears in markets.
02UK rates market shifted from cuts to potential hikes, indicating inflationary pressures.
03Sustained high oil prices could lead to significant growth concerns over the coming quarters.
04Supply disruptions extend beyond energy, impacting fertilizers and other critical inputs.
Market implications
Traders should monitor Brent crude prices closely, particularly the $135 per barrel level, as sustained prices above this threshold could signal a shift in market sentiment towards growth concerns. Additionally, watch for any central bank communications that may indicate a response to inflationary pressures.
Hello, I'm Eric Robertson, Global Head of Research and Chief Strategist at Standard Chartered. And I'm Madhur Jha, Global Economist and Head of Thematic Research also here at Standard Chartered. Welcome to Macro Freestyle, our monthly podcast series where Madhur and I will identify and explore topics that are likely to be most impactful and relevant for financial markets and the global economy.
Welcome back everyone to another edition of our podcast. We are recording this on the 24th of March, 2026. In our last podcast, we had flagged the risk of an escalation in tensions in the Middle East.
Unfortunately, this has materialized with the US-Iran conflict and we are facing an oil shock. And today we'll be discussing some of the broader macro implications of this, whether this poses more of an inflation or a growth risk. Eric, can you share with us what you think is the most likely outcome of this conflict?
And what, if any, conditions might help to bring about a resolution? Look, I think the way I would describe my baseline at the moment is that we will get a military de-escalation at some point in the next couple of weeks. But I should add the caveat that with any de-escalation, I expect a long tail.
And what I mean by that is, even if we get to a point where it feels like a de-escalation is in motion, there will be periodic flare-ups in terms of the military activity. There will be periodic disagreement during the negotiation process. That will result in uncertainty about passage through the Strait of Hormuz, uncertainty about the supply of energy and other products.
So in my mind, this is very different from some of the previous shocks that we've had, whether they be tariff-related or other, in that I think there's a two-step process. And I think that is what markets are really wrestling with. Whether you look at risky assets, or you look at volatility, or some of the other measures of risk, people are struggling with how to price this.
There's obviously significant disagreement about how this plays out. One thing that generally people do agree on is that the full resolution of this is going to take time. And by the way, that is applicable not only to the military side of things, but also the economic side of things.
There's been now destruction of and damage to energy infrastructure. And that infrastructure does not get turned back on with the flip of a switch, right? It has to be rebuilt.
And if we look at Qatar, for example, they're talking about the fact that some of their LNG supplies may be impaired for three to five years. The long-term economic implications are going to remain highly uncertain. And Eric, actually, that's a really good point that you're making, because obviously this oil shock has significant global implications.
Markets so far seem to be taking this more as an inflation shock, not so much a growth shock or demand destruction shock or supply destruction shock. What in your view could make markets worry more about the growth implications? You're absolutely right.
The initial response over the first few weeks has absolutely been on the inflation side. If you look at some of the rates markets around the world, we've gone from pricing several rate cuts from the central banks by the end of the year to pricing in rate hikes. In the UK, perhaps the most extreme example, but we went from pricing 50 basis points of cuts to something close to three hikes, a hundred basis point plus swing in a very short period of time.
And while an extreme example, the direction of travel is relatively uniform across both developed and emerging markets, this shift from rate cut pricing to rate hike pricing. But as you point out, the growth implications are significant. There's also a timing mismatch.
I think the impact on prices will be much more immediate. We'll see that play out very, very quickly. In fact, we're already seeing it in a number of places.
The residual hit to growth is going to play out over a longer period of time. And whether that's because of restricted supplies of energy, fertilizer, other industrial inputs, whether it's restriction of travel, I think the growth impact is going to take several quarters to play out at a minimum. And so I think what you're going to see in terms of markets is rates pricing in the inflation fear and then figuring out the central bank reaction function, and then recognizing, gosh, this is going to be in all likelihood negative for growth.
So it's going to be a multiple step process that makes things more complicated for forward curves in rates, FX, volatility, et cetera. And it really does present a challenge for risk managers. And I guess that brings me to my first question, Madhur.
The big focus for everyone is oil and natural gas. And in your opinion, is there a level in oil, let's take Brent oil, for example, at which we pivot from the inflation fear to the growth fear? In other words, is it a price level or is it staying at a certain price level for a particular period of time?
Eric, that's like the million dollar question I think everybody's looking at. Is it $100? Is it $125?
Is it $150 on Brent? What would really trigger a recession? Now we've looked at the past five global recessions that we've had since 1950.
Four of them have been preceded by oil shocks. So clearly oil shocks are a very important factor in determining whether you might have a global recession. Not the only factor, but an important factor.
There is no particular price level at which this happens. But what we have noticed is that there is a pattern by which there's a very rapid rise in oil prices, almost a doubling in oil prices in a very short period of time, which stays for a few quarters. And that really seems to trigger a confluence of factors.
It triggers central bank monetary policy responses. It also seems to be working through making the economy more vulnerable to other asset bubbles. Something like $135 per barrel on Brent would be where markets should really start worrying.
We need to be concerned about oil prices staying high, even at these levels, or even below $135 per barrel. For growth, there is this kind of supply destruction which has happened, which will have scarring effects. So whether it's private credit risks, or it's an AI-related equity market correction, a lot of other factors could come into play.
That's why we are really quite focused on the growth story. Yes, there's no particular price level of oil, but if it stays high and it continues to rise, that's going to be obviously something that is enough to start us thinking about what the global growth implications could be. While we're all clearly very focused on oil and natural gas and the energy markets, the flow of product out of the Gulf and through the Strait of Hormuz is not limited to energy.
There are other key products that are dependent on the straits and that a number of importing economies are dependent on. Could you talk a little bit about the supply disruption away from oil and natural gas? I think this is a very key point for people to focus on.
The most important thing is that the Middle East is so integrated into global supply chains that it has downstream impact on a wide variety of sectors. And it's not just oil and gas. The Middle East supplies about a third of fertilizers globally.
Now we're into the crop growing season, so clearly the impact of higher fertilizer prices is going to be felt through higher food prices. But it's again not just fertilizer and food inflation that we are worrying about. The Middle East is a source of supply for a lot of other chemicals and petrochemical inputs, whether you take urea, potash, helium, sulfur, sulfuric acid.
The Middle East plays a very significant role in the export of these. Many of these products are quite critical in various downstream sectors. So for example, if you look at helium, helium is used in the manufacture of chips, in medical devices like MRI scanners, in aerospace and defense equipment, including rockets, rocket components.
So helium is very important. Again, Middle East provides about a third of global commercial helium. Sulfuric acid, again, is also used for processing of microchips, the extraction of nickel and cobalt and zinc.
And these are essential for the production of electric vehicles, electronics, power grids. So the implications for the wider sectors just beyond oil and gas can be quite immense. The longer the disruptions continues from the Straits of Hormuz, the more the price impact and the more the supply impact is going to be.
And that, of course, will have very negative implications for the global economy. And Eric, not all economies will be equally impacted by the shock. So who do you think are likely to be the winners and, of course, the losers from what's happening currently?
I don't think there are any actual winners. The vulnerability of Asia's economies to this economic shock is significant. I mean, essentially all of the economies of Asia are importers of oil.
Now, there are some nuances around that in terms of a broader terms of trade vulnerability. Malaysia and Indonesia tend to be more neutral because they import oil, but export other products. But let's be very clear, this is problematic for all the economies in Asia in varying degrees.
One observation that I have so far in terms of the response that we've seen, typically the first thing you see is something like subsidies from governments to try and mitigate the price risk for their consumers and their local businesses. And then perhaps you move on to something like price caps, and then you move on to something like rationing, and then people working from home or moving to four-day weeks. I've been surprised at the speed with which we've gone through each of those stages already in this crisis.
And certainly some of the smaller, more vulnerable economies have gone through all of those steps right away. And I think that is potentially alarming from the growth point of view. And the other challenge in Asia at the moment, and frankly for most of the EM, but let's stick with the Asia theme, is that we've seen quite a bit of currency weakening over the last few weeks against the dollar.
RMB has perhaps been a relative exception to that, but generally speaking, dollar Korea has made new highs, dollar India has made new highs, and we've seen quite a bit of currency volatility. And so central banks are left with some uncomfortable choices. There's the inflation threat, which they may look to guard against, arguing for rate hikes.
There's currency weakness, which may argue for rate hikes. But the impact on growth of rate hikes, energy supply rationing, the hit to global trade for these open economies, to me, Asia is in the eye of the storm. And so I'm watching very closely to see how governments, combined with their respective central banks, respond.
DM is different, and DM is equally being hit by the supply shock in different ways. But so far, the currency volatility has been a little bit more mild, if you will. I still think the rates volatility has been eye-watering, especially in places like the UK.
The yields have moved 100 basis points. We've seen very good rates volatility in the U.S. and in Europe as well. We are seeing a tightening of financial conditions.
Even with the rate hike pricing that we're seeing, I think central banks so far are expressing an appropriate amount of concern about the downside risk to growth. The Fed articulated that extremely well. The ECB articulated that extremely well.
They are in watch and wait mode. They do not want to act preemptively on inflation if they don't have to, because then growth really is quite vulnerable. The question I would ask you, Madhur, on the EM side of things, what are the other factors that affect the reaction function for the EM central banks at the moment?
A lot of these central banks, they're facing almost like a double, triple whammy of factors coming their way. The first is that they have very high share of transport and food in their CPI baskets, which is much higher than what you have for DM countries. So the natural flow of higher oil or energy prices is fairly immediate and quite significant for these economies.
So the central banks have to make sure that inflation expectations don't get unanchored, for which they might have to react much more quickly than a DM central bank has to, because you have this bigger impact coming through and you want to maintain credibility. At the same time, a lot of these countries are also facing the risk of risk aversion, capital flight, pressure on their currency. So again, they have to defend their currencies, which means that they want to keep that interest rate differential with the key central banks in the West.
So overall, expectations are that EM central banks will have to move much faster in terms of taking on a more hawkish stance, whether it is taking out all the rate cuts that were earlier priced in or even moving towards a temporary rate hiking cycle. This will be what really differentiates the EM and DM central banks. DM central banks can afford to take a wait and watch approach because they know that core inflation feed off these kind of oil shocks is very, very limited.
But having said that, over the last 20 or so years, even DM central banks have turned more hawkish when these global shocks have happened because they now realize just how pervasive these shocks can be and how long the impact can be through various channels. Overall, we are seeing a fairly broad based shift towards more cautious and even more hawkish stance coming through from the central banks in general. But Eric, something that I wanted to ask you about, you've written about this many times and there's the risk of a broader war shock.
How should investors be thinking about this? Are there any particular asset classes that feel safe to you? And are there ones which you are a little bit more concerned about?
One of the challenging aspects of this series of events is that correlations have really broken down. And I don't think we can call it a war shock yet because obviously we've seen an extraordinary volatility in energy markets and a few of the sort of related markets. But equity markets, I think, have been surprisingly muted in their reaction.
And the S&P down 7% seems mild considering where oil prices have gotten to. But here's the really interesting thing, that some of the traditional safe havens have not behaved as safe havens at all. Gold is down quite a bit since the start of the crisis.
U.S. treasuries are down quite a bit since the start of the crisis. Ten-year treasury yields went from 3.9% before things kicked off at the start of March to 4.4%. The Japanese yen continues to weaken.
So the traditional safe havens have not performed. And that has real implications for how people think about managing portfolio correlation risk. Because at the end of the day, that's how diversification works.
You have a diversified portfolio of assets that are meant to behave in certain ways during certain conditions. And as we've learned the hard way over the last three weeks, in a very extreme shock scenario, the shock absorbers have failed. They haven't worked the way they were designed to.
Now, we can all explain away why that may have happened. We can explain that gold has been used as an asset for raising liquidity. People have sold their gold holdings to raise liquidity, maybe to pay margin calls.
People are selling treasuries because they're concerned about inflation. But frankly, the reasoning doesn't matter. The fact is these are safe havens that have not been safe.
So what has performed well so far? Cash, RMB on the FX side, the CNY has been relatively stable. But the list of resilient assets is actually pretty short.
That raises questions about how people should construct portfolios or manage risk going forward. There's the short-term debate around de-escalation or continued escalation. But then there's the medium-term economic consequences, which I think you and I both agree have not fully played out yet.
And so the question is, how do you hedge against that? Well, the normal hedges aren't working. So do people have to look elsewhere or do they just reduce their overall, what we call the gross risk and the net risk in the portfolio?
And so far, what we're seeing is people reducing overall portfolio risk rather than trying to hedge and create correlation risk. What it tells us is that the way we need to think about risk in portfolios is changing in real time at the moment. Are there any other issues that you think are worth monitoring but are currently being sidelined because of the concerns around the conflict that audiences should really continue to focus on?
We seem to be in this roller coaster in the global economy and global markets where we get focused on the most pressing issue of the day and other things which are still extremely important and pressing seem to fall by the wayside. The debate around the tech sector, not just in the US but globally, and the sustainability of AI investment and CapEx and the implications for free cash flow, the borrowing and investing that's being done in the tech space at the moment now requires a significant assumption about future profitability. So there's a timing mismatch between borrowing today versus hoped for revenues in the future.
Well, due to the current crisis in the Middle East, borrowing costs or financing costs have gone up. Does that change the calculus around some of these assumptions in the tech space? The other issue is the Russia-Ukraine conflict, which is clearly not resolved.
The current conflict in the Middle East just adds to the complexity there. The final comment I would make is in 2025, we saw the much-waited-for allocation back into EM. EM assets across the board had a very, very good year in 2025 after underperforming for a number of years.
This crisis over the last three weeks obviously stops that allocation trade in its tracks. I think we will come back to this topic of diversification out of the U.S., out of Europe and into EM, but it's obviously on hold until this crisis is resolved. So that's not an additional conflict or crisis, but it's an additional topic for investors and businesses to consider.
Thanks so much, Eric. I think that's a lot of food for thought for our audience. I look forward to speaking again next month.
Thanks, Madhur. Great discussion as always. And to our audience, wherever you are, stay safe.
And as always, thanks for joining us and thanks for listening in. Transcribed by https://otter.ai