Weekly Global Economic Update

Week of March 16, 2026

• Half a decade of shocks and what they reveal about the global economy
• The economic consequences of the Middle East conflict

Half a decade of shocks and what they reveal about the global economy

• The conflict in the Middle East is the fourth major shock to the global economy since 2020. The first was the pandemic, which started in 2020 and disrupted global supply chains. Combined with fiscal and monetary stimulus, it contributed to a temporary surge in inflation. At that time, some observers argued that it would take several years for inflation to revert to low levels. But inflation declined quickly because it was supply-driven rather than demand-driven.

The second shock was the Russia-Ukraine conflict in 2022, which disrupted supply chains not only in energy but also in agriculture and manufacturing. This contributed to an acceleration of global inflation. The third shock was the historically high US tariffs in 2025. While there was an inflationary impact in the United States, it was muted, as companies were reluctant to fully pass on the costs of tariffs to their customers. The tariff shock also contributed to a significant shift in global trading patterns and will likely lead to a shift in supply chain design.

Finally, the conflict in the Middle East represents the fourth shock and, so far, is disrupting supply chains in oil, gas, fertilizer, and air cargo.

There are three lessons from the experience of the past half decade. First, globalization remains an important feature of the global economy and has shown little signs of disappearing. Thus, when shocks come, they tend to have an impact across the global economy. Second, the global system has demonstrated areas of fragility. Shocks in one region can create disruptions on the other side of the world. Third, the global system has shown considerable resilience. Despite the first three shocks, the world managed to avoid a global recession, continued to grow, and only saw a temporary surge in inflation. The free-market system, combined with rapid response by monetary and fiscal authorities, helped to limit more severe economic outcomes. Moreover, many companies quickly diversified their supply chains, in some cases with encouragement and support from governments. Ultimately, such diversification helps reduce the risk of disruption from future shocks.

The economic consequences of the Middle East conflict

• The price of Brent crude oil, which has been highly volatile over the recent weeks, stands at US$101 per barrel as of this writing. The price of European natural gas, which has also been highly volatile, is now 51 euros per MWh, up from 30 euros just prior to the start of the conflict. However, it remains well below the levels reached at the onset of the Russia-Ukraine conflict. Meanwhile, prices of other commodities shipped through the Strait of Hormuz remain elevated. These elevated prices reflect both supply chains disruptions as well as concerns about a potentially prolonged conflict.

The economic impact of these significant increases in commodity prices will depend in large part on how long the Strait remains closed. The resulting economic consequences are not directly due to the military activity in the region. Rather, they reflect a broader pattern of escalation and retaliation that has affected production, transportation, and logistics across the region. Disruptions to shipping through the Strait have constrained maritime transit, while interruptions to oil and gas output have affected production and distribution infrastructure. In addition, disruptions to regional airports have affected both passenger and air cargo traffic.

Meanwhile, it has been reported that Iranian tankers are continuing to pass through the Strait, indicating that Iran may have the capacity to keep the Strait largely closed to others for an extended period. Theoretically, Iran could choose to keep the Strait closed until a mutually agreeable ceasefire is reached. If that happens, the economic consequences of this conflict could be significant.

Meanwhile, the United States carried out strikes on the military facilities on Kharg Island, which is the main transit point for Iranian oil, while refraining for targeting the oil distribution facilities. President Trump said that he will consider doing so if Iran continues to block the Strait of Hormuz. Attacking such facilities would undermine Iran’s ability to generate oil revenue. On the other hand, such an action would reduce the global oil supply and might increase the risk of retaliatory strikes on other Gulf nations.

Meanwhile, the economic consequences of the conflict extend beyond energy, although energy remains extremely important. The price of sulfur, a byproduct of oil and gas refining, has soared. A good deal of sulfur is produced in the Gulf region and is shipped to the rest of the world through the Strait of Hormuz. Sulfur is used to produce fertilizer and is also used in chemicals, semiconductors, and metal processing, including copper production. As a result, the surge in the price of sulfur could have significant consequences in numerous industries, thereby fueling global inflation.

Another chemical that could soon be in short supply is helium. About one-third of global helium production takes place in Qatar and shipments are currently halted. About one-fifth of helium is consumed by the semiconductor industry, which uses helium to cool semiconductors during the fabrication process. A shortage of helium could lead to higher prices for chips.

The disruption in the Gulf, if sustained, will likely lead to an acceleration in inflation in multiple countries, potentially leading to a shift in monetary policies. In the United States, the five-year breakeven rate, which measures bond investor expectations of average inflation over the next five years, has risen by 20 basis points since the conflict in the Middle East began. One result is a shift in expectations regarding the Federal Reserve policy. In the United States, the futures market’s implied probability that the Fed will not change the benchmark interest rate when it meets soon is now 99.1%. This is up from 90.8% nearly one month ago. This shift, in part, reflects the view that there will be an acceleration in inflation due to the Middle East conflict and that, consequently, the Fed maybe be averse to rocking the boat.

What about longer-term expectations for Fed policy? The futures market now sees a 41.5% probability of no rate cut and a 39.9% likelihood that there will only be one interest rate cut before the end of this year. This has risen from a 3.4% probability of no rate cut and a 16% probability of one rate cut, nearly one month ago. This is a significant shift in expectations in just one month and appears to be closely tied to the Middle East conflict. This also suggests that investors are revising their assumptions about the policy stance of the incoming Fed Chair, Kevin Warsh, including expectations regarding the pace and extent of monetary easing previously anticipated. In other major countries, expectations regarding future monetary policy have also shifted.

Investors appear to be assigning a meaningful probability to the possibility that the war could last longer than a few weeks and, consequently, have a sustained impact. Meanwhile, an index of equities on the Saudi market, which initially declined sharply when the conflict began, is now above its pre-conflict level. Thus, investors in Saudi Arabia, despite the country’s exposure to a prolonged conflict, seem to be confident that it necessarily may not last very long.

What happens if the conflict continues for a while? A prolonged disruption to transit through the Strait of Hormuz—the most consequential economic impact of the war—would likely mean sustained high energy prices, perhaps higher than now. That could potentially add to global inflation, weaken purchasing power, and prompt tighter monetary policies. In addition, continued constraints to shipments of Middle Eastern fertilizer to the rest of the world could diminish the crop yields this season, potentially leading to a big increase in the global price of food about six months from now. In developing countries, this could exacerbate the existing economic and food security challenges. In more affluent countries, it could increase financial stress for lower-income households, with potentially significant political implications. Finally, ongoing disruptions to Middle Eastern air cargo corridors will likely disrupt global supply chains in high-end manufacturing.

What will be the impact by country or region? There is much talk about how the United States, as it is now a net exporter of oil and gas, may be less adversely impacted than other countries. While that is broadly the case, US consumers would still likely face higher energy costs, even as the US energy sector may benefit from higher prices. For net exporters of oil and gas, this crisis could mean a shift in resources to other countries. Either way, households would likely see some loss of purchasing power. For countries that import most of their oil and gas and are large manufacturers, such as China and Japan, this crisis could translate to a significant increase in the cost of producing exportable goods.

Week of March 09, 2026

• Conflict in the Middle East disrupts many aspects of the global economy
• Why a rise in oil prices could be less impactful than before
• US job growth halts

Conflict in the Middle East disrupts many aspects of the global economy

• The conflict in the Middle East has led to a sharp rise in prices of oil and gas, shipping, air freight costs, and fertilizers. It has also led to a decline in equity prices, a rise in bond yields, and a rise in the value of the US dollar. It has also disrupted shipping in the Gulf, with the Strait of Hormuz effectively closed, and air traffic in the region down very sharply.

We don’t know how long this conflict will last. If it lasts longer than expected, or if the damage to energy infrastructure is substantial, the economic impact could be significant. A sustained rise in energy and food prices could exacerbate global inflation, potentially influencing monetary policy in many countries. It could also reduce the purchasing power of consumers, potentially leading to an economic slowdown.

What follows are some observations and potential impacts:

Financial impact

The US administration initially suggested that the war would likely last four to five weeks but has since indicated it could be longer and has not dismissed the idea of putting troops on the ground in Iran. Thus, there is uncertainty about the potential duration and scale of the war. Recent activities involving Iran’s neighboring countries highlight the risk of escalation potentially leading to a wider and more disruptive conflict.

In any global crisis, uncertainty typically leads investors to seek assets that are perceived as safe. Historically, in modern times, the perceived safest asset was US Treasury bonds. Notably, the conflict in the Middle East led to a rise in the value of the US dollar and a rise in US bond yields. This combination is not what you might have expected. If the rise in the dollar had been due to the perception of the dollar as a safe asset, then it would be expected that investors would have purchased US Treasury bonds and yields would have fallen. The rise in yields on US Treasury bonds implies that Treasuries are no longer seen as the safest asset. Instead, this role has been assumed by gold, which has risen sharply. But how, then, can we explain the rise in the value of the US dollar?

One reason lies in the role played by oil. Oil is mostly traded in US dollars, and its price has risen sharply recently. Hence, the demand for US dollars has risen, thereby boosting the value of the dollar. If the conflict ends quickly and the price of oil reverts to a lower level, some of the upward pressure on the US dollar could diminish commensurately.

Also, the rise in the price of oil has affected expectations for inflation and, consequently, expectations for Federal Reserve policy. If investors now expect the Fed to keep rates higher than otherwise, as is indicated in the futures market, that implies higher returns and, consequently, stronger demand for dollars. Again, this discussion could become moot once the conflict ends.

• As the price of oil continues to surge, global equity prices have fallen sharply. As of this writing, the US S&P 500 index is down by 2% since the conflict began. Prices are down even more in Europe and Japan. For example, Germany’s DAX index declined by 6.8%. Japan’s Nikkei 225 index declined by 7.9%. The relatively better performance of US equities probably reflects the fact that the United States is a net exporter of oil. As such, a higher price of oil, while negative for US consumers, would be beneficial to some segments of the US economy. In addition, bond yields increased, especially in Europe. This is likely because many investors reassess inflation risks and the response of central banks who may keep interest rates higher than otherwise. Indeed, the chief economist of the European Central Bank (ECB) warned that the war could lead to higher inflation in the Eurozone.

Meanwhile, the Japanese yen has weakened, indicating that, like US Treasury bonds, it is not seen as a safe-haven asset during this crisis. Japan imports all of its oil, with 90% coming from the Middle East. Higher prices mean slower economic growth. Still, the deputy governor of the Bank of Japan (BOJ) said that the central bank won’t shift the trajectory of monetary policy in response to the Middle East conflict. In the past year, policy has been gradually tightened to fight higher than desired inflation. Considering the situation in Middle East, Japan could face even higher inflation.

• As mentioned above, the conflict has led investors to reassess their expectations for inflation and, thus, their expectations for central bank policy. In the United States, the five-year breakeven rate (the expected average rate of inflation over the next five years) increased by 10 basis points recently. Meanwhile, the futures market’s implied probability that there will be no rate cut before July increased from 28% one month ago to 67% just recently (although it fell following publication of a weak employment report). 

Likewise, investors have revised their expectations for interest rate policy on the part of the ECB and the Bank of England (BOE).

Impact on Europe and Asia

With the Strait of Hormuz essentially shut down, producers of oil and liquefied natural gas (LNG) that depend on the Strait are facing growing logistical constraints including limited storage space. Consequently, they are cutting production. It is reported that between 7 and 11 million barrels of oil per day are now missing from the market. Investor response has been to push up the price of crude. Brent crude hit US$90 per barrel today, the highest in two years. Recall that, as recently as February 25, the price was US$70 per barrel.

There is concern that the problem could become far worse. The Energy Minister of Qatar said that the crisis could “bring down the economies of the world.” He said that, within days, all energy exports from the Gulf could shut down, potentially causing the price of oil to rise to US$150 per barrel. He also said that Iran’s attack on Qatar’s largest LNG plant means that, even if the conflict ends quickly, it could take “weeks to months” to return to a normal level of production.

Meanwhile, the cutoff of Qatari gas could be hugely impactful in Europe. Although Qatari LNG only accounts for about 7% of the LNG consumed in Europe, the cutoff is important because, currently, gas stocks are unusually low. In Germany, for example, gas inventories are running at only 27% of capacity, much lower than the 64% that is typical at this time of year. Thus, the loss of Qatari LNG has boosted the price of gas in Europe by more than 70% in recent times.

And, if Europe cannot get LNG from Qatar, where might it find available gas? One answer is Russia, from whom Europe continues to purchase Russian gas, although far less than before the Russian invasion of Ukraine. But this crisis could lead Europe to purchase more from Russia, thereby enhancing Russian revenue and its ability to wage war in Ukraine. On the other hand, Russian President Putin said that Russia might decide to stop selling gas to Europe. Specifically, Putin said that “other markets are opening up. And perhaps it would be more profitable for us to stop supplying the European market right now.” In any event, the Middle East conflict puts Russia and other gas producers in a favorable position.

Meanwhile, the impact of this conflict is also being felt in East Asia, especially Japan and South Korea, which are almost entirely dependent on imported energy, much of which comes from the Middle East. With the Strait of Hormuz essentially shut down, the volume of oil and gas that can be delivered from the Middle East has declined. As such, Asian countries are currently seeking alternative sources. Of particular interest will be gas from the United States and Australia. In China, the government has ordered some refineries to stop exporting refined products.

Impact beyond energy

• Urea is the world’s most widely used nitrogen fertilizer and one-third of the world’s exports of urea come from the Gulf. Moreover, unlike the usage of energy products, usage of urea is time-sensitive, or in other words, it is dependent on the agricultural calendar. Thus, if the conflict in the Middle East lasts several weeks or longer, the disruption to the distribution of urea could have significant consequences for global agricultural production. Moreover, this is now the time of year when demand for urea increases in line with the farming calendar. Indeed, the price of urea has shot up at distribution hubs around the world. As one commodity expert put it, “We’re in the middle of [the Northern Hemisphere’s] spring season applications and if these ships don’t go through the Strait of Hormuz today, they’re not going to arrive in time.” Thus, global food production is at risk.

Urea is produced from synthetic ammonia and carbon-dioxide. The latter is produced during ammonia production as a byproduct of burning hydrocarbons. Hence, most urea plants are adjacent to plants where ammonia is produced, usually where hydrocarbons are in abundant supply. This explains why so much urea production takes place in the Gulf region.

The biggest Gulf exporters of urea are Qatar, Saudi Arabia, and Iran. Their exports go through the Strait of Hormuz, which is currently inactive. In the case of Qatar, the destruction of an LNG plant is affecting urea production not only in Qatar but elsewhere. Indian production of fertilizer is shutting down due to the lack of access to Qatar LNG. Pakistani production is also being hampered.

When Russia invaded Ukraine in 2022, there was also a big increase in the price of fertilizer due to the initial disruption from that war. This will be similar, possibly worse depending on how long the conflict continues. It is a demonstration that, despite all the headwinds, globalization continues to endure. Plus, the global economy remains highly vulnerable to events that disrupt transportation.

• Speaking of transportation, the conflict in the Middle East has rendered 3,000 ships stranded due to the closure of the Strait of Hormuz. Moreover, this includes 10% of the world’s container ships. It is worth noting that the majority of ships passing through the Strait of Hormuz do not carry energy products. Rather, many are carrying merchandise that connect Gulf economies to global supply chains. Thus, the shutdown of the Strait could have cascading effects on supply chains in numerous industries.

In addition, civil aviation, both for passengers and air cargo, has been disrupted. Air space is shut down in Israel and Qatar and is only partially open in Saudi Arabia and the UAE. Given the role the region plays as an air hub for travel between Europe and Asia, the cancellation of 18,000 flights has been hugely disruptive to tourism and business travel.

Perhaps of even greater importance is the impact on the US$8 trillion air cargo market, which accounts for one-third of world trade in goods by value. It is the higher-valued goods that travel by air. This includes semiconductors, mobile phones, pharma products, and others. Notably, more than 12% of global air cargo passes through the Middle East. And it is reported that, since the conflict began, global air cargo capacity has declined by 18% because of the disruption to transportation in the Middle East. Capacity in the Middle East has fallen by 40%. The net impact of this will depend on how long the conflict lasts.

Why a rise in oil prices could be less impactful than before

• If the war continues for longer than expected, and prices stay elevated, it is worth noting that the global economy is likely less vulnerable to oil price shocks than was the case in the past.

Although the share of the Middle-Eastern oil has declined from the global oil output, it remains substantial and is important to the global economy. What has changed significantly, however, is the amount of oil used per dollar of GDP. Consider the US economy, for example. Since 1980, US real GDP has increased by more than 300%. Yet during that period, the amount of oil consumed has barely budged. In other words, the United States is far less dependent on oil than in the past (and the same is true of most other major economies). As such, a shock to the oil market now has a far smaller impact on the economy than in 1980. Recall that, in 1979, the Iranian Revolution and the consequent huge increase in oil prices led to a sharp reduction in economic activity.

Why does the world use so much less oil per dollar of economic activity than in the past? There are several reasons. First, automobiles are far more fuel-efficient than previously, and many are now electric. Second, the world obtains more energy from non-oil sources than in the past, especially clean sources. Finally, the high prices of the late 1970s led businesses, governments, and homeowners to invest in improving efficiency. Office buildings, factories, warehouses, trains, airplanes, and homes use less energy than previously because of that investment.

If there is a sustained increase in the price of oil, it would influence various countries in different ways. For the United States, which is now a net exporter of oil, the impact would be far less onerous than in the past when it was a big net importer. Net importers such as China, Japan, and much of Europe would see a net increase in outflows of resources, thereby having a bigger negative impact on economic activity. In the case of China, it is reported that it has been storing large amounts of oil. If the price rises sharply, China could cut back on purchases and, instead, use stored oil for consumption.

In addition, a sustained higher price could cause an acceleration in global inflation, especially if central banks fail to tighten monetary policy. Recall that, in the 1970s, countries whose central banks accommodated the increase in oil prices saw a big increase in inflation. One exception was Germany where the Bundesbank tightened monetary policy and inflation increased more modestly. In the longer term, this had a positive impact on German economic activity relative to other countries.

US job growth halts

• In the past 12 months, the United States has added 156,000 new jobs with employment declining in five of the last 10 months. Thus, to the extent there is economic growth, it stems from gains in labor productivity. The labor market in the United States is subdued. This is what we know from the US government’s latest report on employment. The report includes data from two surveys: one is a survey of establishments; the other is a survey of households. Let’s first look at the details behind the establishment survey.

The latest establishment survey found that, in February, the number of jobs fell by 92,000 from the previous month. The decline was across multiple industries. For example, employment fell 11,000 in construction, 12,000 in manufacturing, 11,300 in transportation and warehousing, 11,000 in information, 5,000 in professional and business services, 28,000 in health care, 27,000 in leisure and hospitality, and 6,000 in government. The decline in health care employment was particularly notable as this sector has typically been a consistent source of job growth in recent years. In fact, the strong reported job growth in January was largely due to increased employment in health care.

The establishment survey also provides data on wages. In February, average hourly earnings of private sector workers rose by 3.8% from a year earlier. This suggests wages continue to rise faster than inflation, thereby providing workers with added purchasing power.

The separate survey of households, which also includes data on self-employment, found that labor force growth was extremely modest in February, slower than the growth of the working-age population. This resulted in a decline in the rate of labor force participation. Meanwhile, employment fell sharply. The result was that the unemployment rate increased from 4.3% in January to 4.4% in February.

What accounts for the weakness of the US labor market? First, slower growth in the labor force, potentially related to tighter immigration policies, has limited the scope for strong employment gains even as the unemployment rate remains relatively low. Second, the past year of tariffs and tariff uncertainty has likely had a chilling effect on hiring. Uncertainty about the future of trade rules probably led companies to reduce hiring. In addition, some companies may have sought to avoid passing on the cost of tariffs to their customers. As such, they endeavored to cut costs, including labor costs, to avoid taking a hit to their profit margins.

Investor reaction to the latest report is hard to gauge given that investors are more focused on the impact of the conflict in the Middle East. However, the jobs report could have an impact on the calculus of the Fed, all other things being equal. A weak employment report likely boosts the probability of future rate cuts. On the other hand, the potential inflationary effects of the current crisis will likely be front and center for the Fed.