Middle East ceasefire brings relief, but the energy shock will still hit the global economy with a lag

Overview

This report analyzes the impact of the Middle East conflict on the global economy, energy prices, inflation, fiscal policy, foreign exchange, growth, and central bank policy after the US and Iran agreed to a two-week ceasefire. Nomura believes the ceasefire has timely eased market pressure, but its sustainability remains fragile, with the key question being whether the Strait of Hormuz can be reopened quickly, safely, and fully, and whether the two sides can reach a more durable arrangement within two weeks.

Core views

The report's core view is that the better, though still not painless, scenario is for the Strait of Hormuz to reopen, energy price pressures to gradually fade, and stress on vulnerable economies to ease; the worse scenario is that negotiations break down, the war escalates, and Iran continues to keep the Strait of Hormuz largely closed, causing the energy shock to re-intensify and spread into a broader commodities price shock. The impact is highly differentiated across regions: Asia ex-China and Europe are more vulnerable, while economies such as the US and China are relatively more resilient.

Analysis framework

The report uses scenario analysis and cross-country vulnerability comparison, assessing each economy's exposure through energy net import dependence, the weight of energy in CPI, fiscal space, exchange-rate buffering capacity, growth resilience, and central bank reaction functions, and comparing the macro consequences under ceasefire persistence versus renewed conflict escalation.

Methodology notes

• Macro scenario analysisDual-scenario framework of ceasefire continuation versus renewed conflict escalation

  By comparing a better scenario and a worse scenario, the framework assesses the transmission of the energy shock to inflation, growth, exchange rates, fiscal policy, and interest-rate policy.

  The better scenario assumes the Strait of Hormuz reopens and a more durable truce is reached; the worse scenario assumes talks fail, the energy shock re-intensifies, and it evolves into a growth shock.

• Country vulnerability assessmentEnergy net import dependence and policy space assessment

  The higher the reliance on energy net imports, the greater the energy weight in CPI, and the smaller the fiscal and monetary policy space, the more vulnerable an economy is to the shock.

  The report pays particular attention to energy net importers such as Thailand, India, Indonesia, the Philippines, Germany, Italy, and the UK, and notes that limited fiscal space constrains governments' ability to provide subsidies and tax cuts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Crude oil and natural gas

  The Middle East conflict and the transit status of the Strait of Hormuz directly affect energy supply and transportation risk premia.

  Strengths

  If the ceasefire fails, energy prices could rise again and become the core of the commodities shock.

  Weaknesses

  If the Strait of Hormuz reopens and the ceasefire turns into a durable arrangement, price pressures may gradually fade.

  Comparison

  Compared with ordinary demand-driven price fluctuations, this shock is more driven by supply and geopolitical risk.

  Risks

  Breakdown in talks, a longer closure of the strait, damage to energy infrastructure, and replenishment demand from countries could amplify price volatility.

• Currencies of energy net importers

  Deteriorating trade terms and rising import inflation will weigh on the currencies of energy net importers.

  Strengths

  Moderate depreciation can act as a buffer against the trade shock and improve export competitiveness.

  Weaknesses

  A sharp depreciation will worsen imported inflation and force central bank intervention.

  Comparison

  The central banks of Turkiye, India, and Indonesia are more inclined to intervene to limit depreciation; the euro area, Thailand, and the Philippines may be more willing to let exchange rates absorb the shock.

  Risks

  If negotiations collapse, currencies in some net-importing countries could depreciate sharply again.

• Sovereign bonds

  Energy subsidies, tax cuts, and fiscal stimulus affect debt sustainability and term premia.

  Strengths

  A sustained ceasefire could reduce term premia on bonds in vulnerable countries.

  Weaknesses

  Limited fiscal space constrains governments' ability to backstop the economy.

  Comparison

  The UK, France, Japan, South Africa, Thailand, India, Indonesia, and the Philippines are identified as economies with more constrained fiscal space.

  Risks

  Excessive fiscal stimulus could trigger market concerns about fiscal dominance and debt sustainability, pushing yields higher and triggering capital outflows.

• Policy rates

  Central banks need to balance higher headline inflation against the risk of growth shocks.

  Strengths

  If core inflation pass-through is limited, most central banks can look through the headline inflation peak.

  Weaknesses

  Central banks still need to maintain hawkish rhetoric to anchor inflation expectations.

  Comparison

  The report believes hawkish communication from the Fed, ECB, BoE, and Norges Bank may be more likely than actual rate hikes.

  Risks

  If some central banks raise rates amid a growth shock, they may later need to reverse policy more sharply within the year.

Key data

• Ceasefire durationTwo weeksThe US and Iran agreed to a two-week ceasefire to continue negotiations and provide short-term relief to markets.
• US headline CPI forecastFeb 2.4%, Mar 3.4%, Apr 4.5%The report expects the energy shock to significantly lift headline CPI.
• US core CPI forecastFeb 2.5%, Mar 2.7%, Apr 2.8%The report believes core CPI pass-through will be relatively modest, unlike the 2022-23 inflation wave.
• Fiscal vulnerabilityPublic debt ratios in many countries exceed 100% of GDPHigh debt levels limit governments' ability to cushion household cost pressures through energy subsidies or cuts in consumption taxes.
• Fed policy viewExpected to cut rates once in September and once in December this yearIn the better scenario where the energy shock fades, the report is more confident in its view that the Fed will cut rates.

Impact & implications

From an investment perspective, a sustained ceasefire would help ease inflation in energy-importing countries, reduce foreign exchange reserve drain, lower bond term premia, and ease growth downside pressure; but if talks break down, energy prices and broader commodities prices could rise again, currencies of energy net importers could come under renewed pressure, sovereign funding costs in countries with limited fiscal space could rise noticeably, and central banks could be caught between hawkish inflation messaging and growth pressure.

Risks

• The two-week US-Iran ceasefire cannot hold, negotiations break down, and the conflict escalates.
• The conditions for reopening the Strait of Hormuz are unclear, or reopening is slow, continuing to disrupt energy transport.
• A decline in Iran's leadership control and coordination capacity could increase uncertainty around ceasefire implementation.
• Israel continues attacking Iran or its proxies, leading to renewed escalation.
• The energy shock evolves further from headline inflation into a growth shock.
• Countries with limited fiscal space adopt excessive stimulus, creating debt sustainability and capital outflow risks.
• Sharp depreciation in currencies of energy net importers worsens imported inflation.

What to watch

• Whether the Strait of Hormuz reopens fully, immediately, and safely.
• Whether the US and Iran can form a durable peace or longer-term truce within two weeks.
• Whether energy prices fall from shock highs or re-intensify and spread into broader commodities.
• The degree of divergence between headline inflation and core inflation in the March and April CPI data.
• Growth and inflation pressures in energy net importing economies such as Thailand, India, Indonesia, the Philippines, Germany, Italy, and the UK.
• Whether central banks such as those in Turkiye, India, and Indonesia continue using foreign exchange reserves to stabilize their currencies.
• Whether policy communication from the Fed, ECB, BoE, BOJ, RBA, and Norges Bank shifts from hawkish rhetoric toward actual hikes or cuts.