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.
Money leaving the investment funds now being liquidated in Türkiye has largely moved into bank deposits, the country’s central bank chief said Tuesday, adding that the risk of the turmoil spreading to the wider financial system remained limited so far.
Regulators last month ordered the liquidation of over 130 investment funds managed by seven asset managers following warnings by some that they could not meet redemption payments.
Authorities have widened their investigation into suspected market manipulation in stocks and fund markets. Eighty-five suspects have been arrested so far in the probe, Justice Minister Akın Gürlek said Tuesday.
The funds ordered to be wound down had reached more than $20 billion in assets over just three years. About half a million investors have been affected.
There have been sharp outflows from funds undergoing liquidation, and part of it came from foreign-resident investors, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan said Tuesday.
He was answering lawmakers’ questions at Parliament’s Planning and Budget Commission.
For domestic residents, Karahan said, where the money goes matters for dollarization.
“We see that a significant portion of this amount has moved into deposits,” he said. He added that total commercial and savings deposits rose by more than TL 800 billion ($16.27 billion) over the same period.
Karahan said there had also been outflows from foreign-currency funds, and that some of that money could be expected to flow into foreign-currency deposit accounts. Even so, he said, overall deposit preferences were in line with the current Turkish lira share.
He put the lira share of investment funds at about 61% to 61.4%, and said it was holding steady.
Connection to wider system ‘weak’
Karahan said the link between the funds in liquidation and the rest of the financial system was critical for assessing contagion risk, and that current data pointed to a weak connection.
“We can say that the shift toward the Turkish lira in the financial system is continuing in some form, at least based on the data we have at the moment,” Karahan said.
He credited coordinated measures by the central bank and other institutions for keeping the risk of contagion limited so far.
He said the impact so far was mostly confined to the portfolio management companies concerned and their investors.
“We assess that the contagion risk is under control based on the data,” Karahan said. “But this does not mean everything is over. If we see the need, we will continue to take the necessary steps in every way.”
He said there had been a risk of volatility and disruption in lira markets, which was why a number of measures had been taken.
3 areas to watch
Karahan said the liquidation process was only at its start, and that a firm assessment of its macroeconomic effects would need to wait to see how it unfolds.
He said the central bank would track the impact in three areas: wealth, reserves and the real sector.
Karahan said financial wealth could decline somewhat, but that the effect on spending was expected to be smaller than that of the recent fall in gold prices.
For reserves, he said, what matters is where investors leaving the funds put their money. So far the data show a strong preference for the lira.
The third area is indirect effects through household and corporate balance sheets. Karahan said the central bank’s first analyses showed that real sector companies hold only a limited share of the liquidated funds, and that these are mostly large firms with strong liquid assets.
Any balance-sheet impact would therefore be expected to feed less strongly into the real economy. He stressed that these were initial findings and would be updated as data come in.
Cautious stance to continue
In his presentation before the commission, Karahan also said that disinflation is expected to regain momentum provided that supply pressures ease
He stressed that the bank would keep a cautious monetary policy to preserve gains achieved so far in lowering inflation.
Türkiye’s annual inflation dipped below 30% for the first time in almost five years in September, official data showed Monday.
Consumer price growth eased more than expected to 29.73% from 31.51% in August.
That marked the fourth consecutive month of decline, after the downward trend that started in mid-2024 stalled earlier this year following a sharp rise in energy prices caused by the Iran war.
Monthly price growth also came in below expectations at 1.84%, the same as in August.
Some analysts said the September reading raises the prospect of an interest rate cut at the Oct. 22 meeting.
The bank has kept its benchmark one-week repo rate at 37% this year, as it monitored the inflation impact of the Iran war.
Karahan said a slowdown in the disinflation process had been caused by war-related energy price volatility. But he added that “the main trend in inflation remains below annual inflation,” signaling that disinflation would continue if supply pressures fade.
He noted that upside risks to energy prices are being evaluated and that tight policy is seen as important in limiting the inflationary impact of supply shocks.
Karahan said a weaker-than-expected improvement in inflation expectations poses a risk to the disinflation process.
On the other hand, a slowdown in services inflation is continuing despite supply shocks, with weaker domestic demand also contributing, he noted.
Leading indicators show that a slowdown in rent inflation is expected to continue, Karahan said.
A slowdown in domestic demand has become marked, with indicators confirming a weakening of consumption activity, he noted.
Karahan also said the current account deficit-to-GDP ratio in 2026 is seen below long-term averages.
Türkiye’s combined electricity generation from solar and wind sources reached a record 9.9 billion kilowatt-hours (kWh) in August, the highest level on record, according to the Energy and Natural Resources Ministry.
Solar power generation stood at 5.16 billion kWh in August, while wind generation reached 4.74 billion kWh, the ministry said Tuesday.
Solar accounted for 14.1% of total electricity generation during the month, while wind’s share was 12.9%. Combined, the two sources generated a record 9.9 billion kWh.
Hydropower remains largest source
Türkiye generated 36.71 billion kWh of electricity in August, with hydropower maintaining its position as the largest source.
Hydropower accounted for 24.7% of total generation, producing 9.08 billion kWh during the month.
Renewable sources accounted for 56.4% of total generation, at 20.7 billion kWh, while domestic sources accounted for 69.7%, or 25.58 billion kWh.
Daily electricity generation also reached its highest level of the year so far in August. The daily record was set on Aug. 13, when generation reached 1,241,291 megawatt-hours.
Domestic generation reaches record share
During the January-August period, hydropower generation reached 75.2 billion kWh, wind generation 30.4 billion kWh and solar generation 29.8 billion kWh, marking the highest levels recorded for the corresponding period since 2000.
Domestic sources accounted for 73.2% of electricity generation during the period, producing 181.8 billion kWh. Both the volume and share were the highest for the corresponding period since 2000.
Renewable sources accounted for 60.3% of generation, at 149.8 billion kWh, also representing the highest volume and share for the corresponding period since 2000.
Energy and Natural Resources Minister Alparslan Bayraktar said Türkiye aimed to build a strong energy infrastructure through long-term investments in renewable energy.
“Our long-term investments in renewable energy infrastructure continue to translate into record generation figures,” Bayraktar said.
“Our goal is not only to meet today’s energy demand, but to build a strong, sustainable and innovative infrastructure that is completely free from external dependence,” he said.
Bayraktar added that Türkiye would continue integrating its substantial solar and wind potential into the grid using advanced technologies as it pursues its goal of achieving full energy independence.
Justice Minister Akın Gürlek said Tuesday that 85 suspects had been arrested so far in the investigation into Türkiye’s fund turmoil, and that five people had already handed back money they made through what he called “unjust gains.”
Gürlek said authorities would recover such profits from others who made them through market manipulation.
Regulators last month ordered the liquidation of over 130 investment funds managed by seven asset managers following warnings by some that they could not meet redemption payments.
Authorities have widened their investigation into suspected market manipulation in stocks and fund markets.
Legal action has been taken against 207 people in total, with measures imposed on the assets of many of them, Gürlek told Anadolu Agency (AA).
The funds ordered to be wound down had reached more than $20 billion in assets over just three years. About half a million investors have been affected.
Türkiye’s Savings Deposit Insurance Fund (TMSF) has opened accounts for investors seeking to return what authorities describe as “excessive gains” from fund sales.
Gürlek said five people had returned their unjust gains so far. Reports said among them was Fatma Betül Sayan Kaya, who resigned as a deputy chair of the ruling Justice and Development Party (AK Party) after she and her husband were alleged to have made substantial profits trading shares ahead of the turmoil.
Profits made by people who earned excessive gains over a short period would be transferred to a fund set up within the TMSF, the minister said.
“We will pursue our rights to the end within the framework of the law,” Gürlek said.
Gürlek drew a line between two kinds of earnings. Legitimate profit, he said, comes from citizens putting their savings into stocks and the stock market. The other kind came from so-called “bubble” stocks, where traders made abnormal profits by moving in and out quickly.
He said investigators had found that some people in closed and open funds had acted on tips and inside information, and used manipulative trades to make “extraordinary” profits over a short time.
He said the Istanbul Chief Prosecutor’s Office, working with data from the Capital Markets Board (SPK), Borsa Istanbul Stock Exchange and the Central Registry Agency, had frozen the assets of people who made abnormal gains.
Some of them had been arrested, he said, and others had fled. He said the process was continuing.
Gürlek said his ministry first noticed unusual movement in some funds and shares in February 2025 and wrote to the SPK about it. Citizens’ complaints then increased sharply in August 2026. Permission to investigate was granted later that month, he said.
Gürlek said the State Supervisory Council (DDK) had been tasked with examining whether any public institutions were negligent.
He said the Turkish market and economy were very strong and that a problem in a small part of the market should not be generalized.
The U.S. trade deficit surged more than analysts expected in August, government data showed Tuesday, hovering at its widest level since March 2025, driven by imports of oil and advanced tech products like chips.
The trade gap in the world’s biggest economy jumped 13.7% to $105.6 billion, according to Commerce Department data.
This was larger than the $102 billion projected in a consensus forecast released by MarketWatch.
U.S. trade flows have swung significantly since President Donald Trump returned to the White House in January 2025, as businesses rushed to get ahead of his sweeping, and fast-changing tariffs on trading partners.
The latest figures, which are adjusted for seasonality but not inflation, also reflect a surge in global energy prices from the war in the Middle East.
U.S.-Israel strikes targeting Iran in late February had triggered Tehran’s response in blocking the Strait of Hormuz, a key waterway for energy transport, which sent oil prices soaring.
Both sides remain locked in conflict.
In August, U.S. imports rose by 4.3% to $420.8 billion, driven by crude oil, gold, semiconductors and industrial machinery.
U.S. exports climbed by 1.4% to $315.2 billion, partially driven by energy exports too.
German factory orders dropped sharply in August, more than forecasted, as large-scale orders for aircraft, ships, trains and military vehicles declined, official data showed Tuesday, underscoring the fragility of a recovery in Europe’s biggest economy.
New orders, a key indicator of future business activity, were down 10.6% from a month earlier due to a drop in large-scale domestic orders, according to provisional data from Destatis.
It was the first decline in four months and more than the 1% decrease forecast by analysts surveyed by the financial data firm FactSet and Reuters.
The long-stagnant German economy has been slowly recovering on the back of massive public spending, with some recent data generally pointing to signs of growing strength.
The economy ministry said August’s order data thus represented a “marked setback.”
The decline was entirely attributable to a 61.5% slump in what the statistics office classifies as “other transport equipment,” a category that more than doubled in July due to an exceptionally high volume of large-scale orders of ships, railway rolling stock and aircraft.
When large-scale orders are excluded, new orders in August were 0.1% lower than in the previous month.
Weak figures likely to drag on Q3 growth
The weak figures suggest industry will weigh on third-quarter economic growth after helping to drive expansion in the first half of 2026, although analysts expect a rebound in the fourth quarter as government contracts pick up.
The German economy grew by 0.3% in the second quarter, prompting the government to raise its full-year forecast to 1.3%.
Much of the momentum seen in German industry so far this year has been driven by defense spending.
“Excluding these highly volatile large orders, bookings in the manufacturing sector have been treading water for months,” said Jupp Zenze, economic expert at the German Chamber of Commerce and Industry.
“Broad-based economic momentum remains absent.”
Economist points to full order books
The three-month comparison, which strips out some of the month-on-month volatility, showed that new orders in the period from June to August were 1.3% higher than in the previous three months.
Based on the figures available so far, the industrial sector likely slowed growth of the German economy in the third quarter, in contrast to the first half of the year, said Commerzbank senior economist Ralph Solveen.
However, Solveen expects this trend to reverse in the fourth quarter, as the government is likely to issue more contracts, which should have a positive long-term impact on sales and production.
“This outlook is also supported by the significant improvement in business sentiment over the past few months,” he said.
After revision of provisional data, new orders in July increased by 3.2% compared with the previous month, up from the previously estimated 2.5%.
According to the latest data from July, the order backlog provided coverage for a record nine months, said Marc Schattenberg, economist at Deutsche Bank.
“The disappointingly weak August figures should be viewed in the context of already very full order books,” Schattenberg said.
Foreign orders were down 5.4% in August on the month, with orders from the euro zone registering a decline of 5.4% and orders from outside the eurozone decreasing by 5.5%. Domestic orders declined by 17.3% on the month.
Spain’s government on Tuesday approved emergency measures to address the housing crisis, after an outbreak of violence in the coastal city of Barcelona the previous night that drew tens of thousands of people into the streets.
The Barcelona turmoil late on Monday followed protests across the country over the weekend that demanded measures to resolve a crisis sparked by the eviction of an 87-year-old woman in Madrid, the country’s capital.
In Barcelona, Spain’s second-largest city, a severe weather alert over the weekend had forced organizers to reschedule the protest for Monday. What began as a massive peaceful march turned violent when groups of hundreds of hardcore activists clashed with police, throwing stones and setting fire to trash containers.
Prime Minister Pedro Sanchez’s government approved measures similar to those rejected by Parliament last Friday, which prompted his call for early elections on Nov. 29. The measures will be sent for ratification by an interim legislature, which remains active until the elections.
The smaller, interim legislature – known as “permanent commission” – is composed of 69 members, compared to the 350 that sit in the regular Parliament.
Alejandro Quiroga, professor of political science at Madrid’s Complutense University, said the maneuver of having decrees approved by the interim legislature was constitutional but also a necessary political move by Sanchez.
“I don’t think Sanchez had an alternative,” Quiroga told the Associated Press (AP). “If you are calling early elections so you can keep the public’s focus on housing, you can’t just sit back and do nothing about it. That wouldn’t have been smart.”
The new measures are to extend protection against evictions for vulnerable Spaniards until 2030, regulate room rentals, impose a new tax on seasonal rentals, ban speculative real estate purchases and give tax breaks to landlords, Housing Minister Isabel Rodriguez told reporters last week.
Rising costs and a housing shortage are pricing many Spaniards out of the housing market, despite strong economic growth in Europe’s fourth-largest economy.
The protesters have been demanding stronger protections for tenants, measures to combat fraud and a ban on evictions when alternative housing is unavailable.
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