Economy
Stagflation risks pile up as Iran war stretches into 3rd month
Financial markets are increasingly struggling to put aside the economic impact of the Iran war, as the ongoing shutdown of the Strait of Hormuz extends the biggest-ever disruption to energy supplies.
Two months into the conflict, the global economy faces a toxic mix of slowing growth and high inflation – stagflation.
Even as tech stocks lift world shares, analysts warn that the longer Hormuz remains shut, the greater the recession risk for energy-importing regions.
“The probability of a recession in Europe, the U.K., and parts of Asia is higher than is priced into equity markets,” said RBC BlueBay’s head of market strategy Mike Bell.
Here is how the risks are shaping up across markets:
Oil watch
Oil remains the key barometer.
Before Thursday, Brent crude was trading at around $112 a barrel, more than 50% above pre-war levels, and continues to rise as the war drags on. Early on Thursday, it reached the highest level since the conflict started, surpassing $125 before easing moderately.
High energy prices threaten growth by squeezing consumers and companies while fuelling inflation.
Citi says it’s considering an adverse scenario in which Brent climbs to $120 through year-end, cutting global growth to between 1.5% and 2% and lifting headline inflation to nearly 5%.
Gas prices in Europe and Asia have also risen. Farmers face a second surge in fertilizer prices in four years, while countries including Sweden have warned of potential jet fuel shortages.
Financial conditions
Despite sharply higher borrowing costs, the shock has yet to show up clearly in overall financial conditions.
Market-based measures – which track how asset prices affect funding availability and future growth – tightened to their most restrictive levels since last spring in the U.S. in March, but have since stabilised, helped by April’s equity rally, according to a closely watched Goldman Sachs index.
Conditions have tightened modestly in the eurozone and Japan, driven by rising borrowing costs. Britain stands out, with a much sharper tightening that points to a heavier growth hit.
U.S. faces more inflation
The impact varies by exposure to energy flows through Hormuz. In the U.S., gas prices are now below pre-war levels.
Jefferies chief European economist Mohit Kumar said both the scale and nature of the stagflation shock differ across regions.
“Inflation will still be higher in the U.S., but that’s an oil price impact; the impact on growth is much less in the U.S. than in Europe.”
U.S. business activity picked up in April, though output prices jumped. Consumer inflation expectations for the year ahead jumped to 4.7% this month from 3.8% in March, while market-based gauges have also moved higher.
JPMorgan CEO Jamie Dimon said this week that the worst-case scenario of stagflation remained.
Europe in a tight spot
Europe’s reliance on energy imports leaves it especially vulnerable, with data already pointing to a stagflationary hit.
Data on Thursday is expected to show eurozone inflation nearing 3%. Contracting business activity, tighter bank lending criteria, and surging inflation expectations signal mounting pressure.
Germany’s IMK institute sees a 34% chance the bloc’s largest economy slips into recession in the second quarter, up from 12% in March.
ING’s head of global macro, Carsten Brzeski, said another month of Hormuz disruption would likely trigger at least a technical eurozone recession.
U.K. business activity has held up better so far, but risks are rising. The International Monetary Fund (IMF) hit Britain with the biggest growth downgrade among rich economies.
Reflecting inflation worries, borrowing costs in Europe have risen faster than elsewhere as traders bet on higher U.K. and eurozone rates. Britain’s two-year yields are up 90 basis points since the war began.
Equity markets, perhaps more focused on growth, are down 4% in the eurozone and 5% in Britain, while U.S. shares have risen.
Asia hit hard, China outlier
Asia, which typically takes about 80% of Gulf oil exports and 90% of LNG shipments, is bearing the brunt. Parts of South and Southeast Asia are already facing energy shortages.
Foreign investors are pulling out of Thailand, and the Philippines is among the hardest hit, and Indian companies could be under pressure.
Elsewhere, the Bank of Japan raised its inflation forecasts and looks set to raise rates.
China is the exception. Backed by ample oil reserves and a diversified energy mix, it grew 5% in the first quarter. Investors are betting on Chinese battery and electric vehicle companies, while low inflation has helped Chinese bonds rise as others fell.
Still, China is not immune. Higher energy costs could squeeze already thin factory margins just as global demand for its exports slows.
The European Union will move to limit young children’s access to social media across the 27-member bloc, European Commission President Ursula von der Leyen said on Monday, in what would be the biggest such effort to date to guard against online dangers.
Von der Leyen’s remarks came as a special EU panel looking into the challenge recommended forbidding access for those under 13 until tech companies can prove their platforms are safe.
Growing awareness of the dangers social media poses for young, developing brains has shown up in a wave of new restrictions globally. Australia, the U.K., Türkiye, Indonesia and others have passed bans on kids under 16 or 15 from using platforms like TikTok, YouTube and Instagram.
Laying out a list of her concerns about the use of social media by kids, von der Leyen, a doctor by training, said that children under 3 should have no exposure to screens at all.
“I believe we need to consider phased and gradual access for different age ranges because childhood won’t wait and once it’s gone, we can never give it back,” von der Leyen told reporters.
“Just as we don’t give our children keys to the car before they have their license, or we do not let them buy alcohol until they are legally allowed. We need to set the age at which they can, the children can, legally access social media,” she said.
“This is not about whether children can access social media. It is about whether and when social media can access our children.”
Von der Leyen noted infinite scrolling as one of the “addictive” traits that tech companies must address.
Beyond toddlers, she did not mention any precise restrictions, but she and the European Commission, the EU’s powerful executive branch, are likely to come up with a proposal for the 27 member countries to weigh in the near future.
Von der Leyen’s policy proposals carry great influence with EU member countries.
A special panel set up to study child safety online delivered its report to the EU chief on Monday. The report said that when it comes to safety, “the burden of proof needs to be on providers, not regulators, parents and children.”
“Until they demonstrate that their services are safe by design, social media and other digital services providers should have restricted access to children under the age of 13 in the EU,” said the report, which is likely to influence von der Leyen’s thinking.
It recommended that “further precautionary age restrictions” should be considered by EU countries for children over 13.
The European Union has been mulling a social media ban since a push by EU states, including Greece and France, for limiting access, with pressure intensifying for a bloc-wide ban.
A legal proposal will come in the second half of the year, von der Leyen added, but she is expected to give an indication of what the restrictions will look like in September.
The report by co-chairs child psychiatrist Jorg Fegert and epidemiologist Maria Melchior offered a glimpse of how the EU’s proposal could look like as they recommended:
No screens at all for babies and toddlers; Supervised use of “age-appropriate social media” and devices children aged between three and 12 by parents or teachers; For those aged 13 to 18, “evolving autonomous use” of social media and other digital platforms that have “key safety features.”
Many social media and video sharing platforms including TikTok and Meta’s Facebook and Instagram are only available to children aged 13 and over.
Platforms “must prove that their services do no harm. In Europe, whoever develops a product is responsible for its safety,” von der Leyen said.
“We are convinced that Europe must introduce protective measures to ensure the safety of children and adolescents in the digital world,” Melchior said, standing next to von der Leyen.
The EU has already ramped up the pressure on social media platforms to change in recent months, telling Facebook and Instagram Friday to dismantle their “addictive” features, after a similar warning to TikTok in February.
Divided EU positions
The report did not recommend a blanket ban on digital platforms including social media, and von der Leyen did not back such a move.
What the panel found was the Australian ban faced difficulties as children found ways around the limits, forcing the EU to reconsider its approach.
Instead, it wants platforms to remove or limit features like autoplay content, infinite scroll, and push notifications.
The European Parliament in October called for a ban on social media for children under the age of 16, a position some EU lawmakers continued to back – although divisions remain over the age.
“I still believe the age should be 15, not 13. 13 is already the minimum age used by most major social media platforms today,” EU lawmaker Christel Schaldemose said in a statement after the panel’s report.
There will likely be difficult negotiations since any EU proposal will only become law after talks between the parliament and member states.
Targeting harmful design
A dilemma for the EU is how to avoid different age limits across 27 countries. For example, Spain wants to ban under-16s accessing social networks, while France proposes prohibiting children aged 15 and under.
And then there are EU nations such as Estonia that oppose a ban.
Von der Leyen said the European Commission, the EU’s executive arm, would “have a very careful look” at the national proposals.
Brussels will “integrate” their work, she said, and then prepare its own proposal to “harmonize the approach and to find a common solution.”
The EU already has a bolstered armory to rein in Big Tech and protect users online, and the commission has said more rules are on the way.
EU consumer protection chief Michael McGrath vowed a new law, expected later this year, will give children stronger protection against addictive design.
Volkswagen may need to eliminate about 50,000 additional jobs to match the competitiveness of its rivals, its CEO told employees in an internal memo, effectively confirming for the first time that the carmaker is considering cuts of up to 100,000 positions.
Oliver Blume is battling to streamline Europe’s biggest carmaker, whose profits have slumped as its faces billions of euros in tariff costs, stiff competition in China and pressure on its German manufacturing network to become more efficient.
After already agreeing 50,000 job cuts across the group, including its Porsche and Audi subsidiaries, the company must work on reducing costs further, having calculated a cost disadvantage versus comparable companies of 20%, Blume said in the memo seen by Reuters.
This means a “theoretical deduction” of another 50,000 jobs worldwide, the memo said.
“We are currently assessing across all brands, companies and regions how many adjustments are actually necessary and feasible,” Blume said in the document.
Staff costs are determined not only by the number of employees but also by labor costs, he added. “We must also pull this lever,” he said, indicating that the exact scale of the job cuts has not yet been finalized.
The company had previously declined to comment on reports it was considering up to 100,000 job losses.
The memo follows angry calls from workers for management to explain its restructuring plans, which Blume presented to the company’s supervisory board on Thursday.
Nationwide protests were held by trade union IG Metall on Thursday, while the company’s works council also outlined its fury over the weekend.
Sources familiar with the matter said labor representatives on the committee blocked the proposals, which were said to include job cuts and the possible closure of four factories.
“As of today, we still cannot confirm competitive use cases for the plants of Emden, Hanover, Zwickau and Neckarsulm in the 2030s,” Blume said in the memo.
He said he preferred “intelligent solutions” to closures, having previously pointed to the defense industry or the production of Chinese Volkswagen models in Europe as options for underutilized factories.
Tanker traffic through the Strait of Hormuz fell in the past day to a two-month low, according to shipping data Monday, amid heightened safety worries after renewed strikes between the U.S. and Iran and attacks on ships.
Shipping industry sources said vessels were increasingly switching off their public AIS tracking transponders, making it difficult to determine the full number of ships crossing the waterway.
Based on available data, oil and gas tanker traffic fell to its lowest level since May 25, according to analysis from Kpler.
“Should the renewed escalation in the strait lead to another prolonged closure of Hormuz, the world will find itself in a much tougher spot,” ship broker Gibson said in a report.
“With global inventories rapidly depleted in recent months, this is a recipe for much tighter supply, higher prices and significant downside risk for tanker markets.”
The Sea Faith oil products tanker was among the few visible vessels sailing toward the entrance to the Strait of Hormuz near the Iranian side of the waterway, with a destination of Sohar, according to LSEG and MarineTraffic ship-tracking data on Monday.
Commercial traffic through the Strait of Hormuz “continued at reduced levels,” the U.S. Navy-led Joint Maritime Information Center (JMIC) said in an advisory on Sunday.
“Traffic patterns continued to reflect operator caution following recent attacks.”
At least three pairs of tankers were involved in ship-to-ship transfers outside of Hormuz off Oman’s coast in the Gulf of Oman, according to the latest satellite imagery from July 11 reviewed by Reuters.
Ship-to-ship (STS) transfers typically involve the transfer of oil from one vessel to another. Since the conflict began on Feb. 28, STS transfers have enabled faster deliveries of oil onto waiting ships that do not need to sail through Hormuz.
“Some ships are slipping in and out,” one shipping official said on Monday.
“This has to be viewed as a managed conflict now similar to the Houthis in the Red Sea,” the source said, referring to the Yemeni militia, which paralyzed traffic through the Bab al Mandeb waterway for nearly two years before calling a cease-fire in 2026.
Trump, Iran differ over strait status
U.S. forces completed another wave of strikes against Iran on Sunday, hitting dozens of targets at multiple locations with precision munitions, the Central Command said.
U.S. President Donald Trump said on Sunday that the Strait of Hormuz is open to commercial traffic, although Iran declared earlier that it closed the strait after a vessel traveled on an unapproved route and was struck.
Iran’s Revolutionary Guards said on Monday that their navy stopped two ships in the Strait of Hormuz last night by shutting down their systems. They did not name the ships involved.
A container ship sustained damage from an unknown projectile which caused a fire in the engine room on Sunday, JMIC said.
Traffic slowdown
Six vessels transited the strait on Sunday, ship-tracking data from Kpler showed, the lowest number in five weeks.
Tankers that exited the strait included the Very Large Crude Carrier Humanity, laden with 2 million barrels of Iranian oil, and another tanker, Capetan Andreas, carrying about 500,000 barrels of Kuwaiti oil products, the data showed, while three empty tankers entered the Gulf to load oil.
Most of the tankers switched off their transponders when crossing the strait.
There were no liquefied natural gas tankers that entered the strait over the weekend that were visible on ship-tracking data.
One tanker controlled by the Abu Dhabi National Oil Co exited the strait between July 10 and July 12, Kpler data showed. The vessel was heading for Dahej port in India.
State energy company BOTAŞ on Monday started construction of a fourth storage tank at its terminal in northwestern Türkiye, a move that will increase the facility’s LNG storage capacity by nearly 60%.
The new 160,000-cubic-meter storage tank will raise the Marmaraereğlisi LNG Terminal’s total storage capacity to 415,000 cubic meters from the current 255,000 cubic meters, Energy and Natural Resources Minister Alparslan Bayraktar said.
The investment is expected to improve Türkiye’s flexibility in managing natural gas supplies by expanding its ability to store LNG delivered by ships, regasify it when needed and transport it via road tankers while maintaining it in liquid form.
Located in Tekirdağ province, the Marmaraereğlisi LNG Terminal plays a strategic role during periods of high natural gas demand, particularly in winter months, with a daily regasification capacity of 37 million cubic meters.
The terminal can accommodate conventional LNG carriers as well as large-capacity Q-Flex and Q-Max vessels, which are among the world’s largest LNG carriers.
Around 65 LNG vessels dock at the facility annually, with the terminal meeting approximately 15% of Türkiye’s annual natural gas demand.
In addition to LNG storage and regasification operations, the facility carries out road tanker loading, fuel supply and reload operations.
Strengthening resilience against energy shocks
Bayraktar said the terminal’s ability to source gas from multiple markets, combined with its storage capacity and regasification infrastructure, makes it a key component of Türkiye’s energy security strategy.
The minister noted that fluctuations in global energy markets have demonstrated the importance of having strong infrastructure.
Bayraktar said the new investment will “strengthen our natural gas infrastructure” and will “increase our resilience against crises.”
Türkiye currently has five LNG entry points, including two LNG terminals and three floating storage and regasification units (FSRUs).
Alongside the Marmaraereğlisi LNG Terminal, BOTAŞ operates the Dörtyol and Saros FSRU facilities.
As part of Türkiye’s National Energy and Mining Policy, LNG regasification capacity has increased nearly fivefold since 2016, rising from 34 million cubic meters per day to around 161 million cubic meters per day.
The government aims to raise total LNG regasification capacity to 200 million cubic meters per day with the addition of two new FSRU facilities.
Türkiye has informed Canada that it will participate in the Defense Security and Resilience Bank (DSRB) as a founding member, a report said on Monday
Canadian Prime Minister Mark Carney said at a NATO summit in Ankara last week that nine countries, including Türkiye, had committed to the bank, in what was seen as a boost for the multilateral drive to help rearm allied nations.
Defense Ministry sources said over the weekend that Türkiye was still evaluating possible participation.
“Türkiye has informed Canada that it will participate in the bank,” a Turkish official told Reuters on Monday.
According to Carney’s statement last week, Albania, Belgium, Greece, Latvia, Luxembourg, Romania, Türkiye and Ukraine had all pledged their support to the bank, which will be based in Canada.
The roster contained no heavyweight G-7 nations other than Canada, potentially limiting the bank’s financial firepower, although Canada’s foreign minister, Anita Anand, told Reuters it would remain open to new members.
The bank’s purpose is to bolster the defense of like-minded allied nations by raising up to 100 billion pounds ($134 billion) in cheap financing.
Carney is promoting the DSRB as part of his call this year for an alliance of “middle powers” to combat what he sees as the fracturing of the traditional U.S.-led world order.
A group of former NATO security advisers, senior ex-military personnel and bankers proposed the bank in 2024.
NATO nations and their allies are grappling with rising defense demands linked to the war in Ukraine, growing tensions with Russia and concerns about China’s military expansion.
NATO leaders agreed in June 2025 to spend 5% of GDP on defense and security-related investments by 2035.
Top banks, including JPMorgan, Deutsche Bank, Commerzbank and ING, have joined the project alongside Canada’s RBC, BMO, CIBC, National Bank of Canada, Scotiabank and TD Bank.
Europe has relied on jet fuel imports from the U.S. and Asia, boosted refinery output and tapped stockpiles to keep aircraft in the air. And yet it remains the region most vulnerable as renewed tensions in the Middle East increase the risk of further supply disruptions.
Britain, France and Germany are particularly exposed in a continent where decades of refinery closures left it more reliant than most on Middle Eastern shipments via the Strait of Hormuz.
The Strait, conduit for around a fifth of the world’s seaborne oil and liquefied natural gas until U.S.-Israeli airstrikes unleashed a war on Iran at the end of February, partly reopened in June.
In July, however, a fragile truce has come under threat from strikes by both sides.
Data from consultancy Energy Aspects dated June 18 already anticipates a supply deficit across Europe of nearly 600,000 barrels per day in the third quarter, against surpluses of 116,000 bpd in the United States and 425,000 bpd in Asia-Pacific.
Inventories stood at 38 million barrels at the start of June, compared with 99 million in the United States, Energy Aspects said. That leaves Europe with less than 30 days of demand cover, Reuters calculations show – the tightest of the major jet fuel markets.
The most recent data available from the International Energy Agency’s (IEA) latest monthly report, showed provisionally jet fuel stocks were 10% higher year-over-year at the end of May, while refinery output rose 30%. The figures also implied only a month of leeway.
“We still do expect some tightness through August at this rate,” said Janiv Shah, analyst at Rystad.
The European Commission has also acknowledged the situation could get worse.
EU Energy Commissioner Dan Jorgensen said in June the bloc faced tighter jet fuel stocks toward the end of the summer holiday season and that Brussels would coordinate releases of national reserves if needed.
Cargo from Canada to South Korea
Until war broke out at the end of February, Europe had relied on the Middle East for around half of its jet fuel imports.
In March, analysts had expected African countries, which sourced nearly all their jet fuel from the Middle East, to be the hardest hit.
However, they have managed to increased imports from Nigeria’s Dangote refinery, as well as India and Oman, according to data from commodities intelligence firm Kpler.
Europe, meanwhile, has so far prevented supplies running out by turning to new sellers, such as Canada.
In June, Europe overall imported 673,000 bpd of jet fuel, its highest since October 2025, Kpler data showed.
The U.S. and Nigeria were the biggest exporters to Europe, but Kuwait, Canada, India and South Korea also provided cargoes.
Imports from India in June reached their highest since February and nearly 25,000 bpd Kuwaiti barrels are due to arrive in August for the first time since early March through a ship-to-ship transfer on the ship Proteus Harvonne.
Before flows were interrupted, Kuwait was one of the biggest suppliers of jet fuel to the region.
Among those who increased production to ease the strain, Italian refiners increased jet fuel production by 10% in the first four months of the year.
The countries’ imports fell 6%, enabling domestic production to meet nearly 70% of demand in March and April, according to UNEM, Italy’s fuel producers’ association.
Eni, which accounts for around half of Italy’s jet fuel production capacity, boosted output by importing semifinished products from outside Europe, industry sources said.
Jet fuel prices in northwest Europe, meanwhile, have fallen to around $133.27 a barrel from a record $215.32 at the end of March, easing pressure on airlines. Fuel typically accounts for between 20% and 25% of operating costs.
Immediate discounts to air ticket prices are unlikely, analysts say, as demand is strong and capacity is limited, especially after many carriers cut flights to maximize fuel supplies.
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