The fog of war

The war by the US and Israel against Iran wasn’t a total surprise, given weeks of military build-up and stalled diplomacy, but once it happened, it was impactful.

Although the top Iranian leaders were killed in the opening strikes, and the regime is clearly fighting for its survival, the situation remains very fluid. In a war, the first certainty is uncertainty. Even when a conflict is said to be limited or carefully calibrated, it can easily escalate beyond its original frame. Outcomes in a war theatre are rarely linear and often involve unintended consequences. Therefore, we use a scenario-based approach to outline probability- weighted scenarios and their potential economic and market-related implications, in order to get a better grip on what comes next for the global economy and risk markets.

Central banks are likely to look through the shock

In our central scenario (50 percent probability), with a relatively short, decisive campaign, the impact on inflation should remain relatively modest, adding about 0.3 percent pts, in part because most economies still operate with some degree of spare capacity. The conflict could reduce GDP growth by 0.1-0.2 percent pts, with the US and Switzerland at the lower end of that range and the euro area at the upper end. Central banks are likely to look through the shock. In a worst-case (25 percent), however, a drawn-out conflict, with damage to regional energy infra-structure, could see a meaningfully negative impact on growth, inflation and risk markets.

In China the annual meeting of the NPC started 

Finally, in China, the annual meeting of the National People’s Congress (NPC) started on Thursday. The 2026 growth target has been lowered to 4.5-5 percent, in line with our projections. Fiscal policy is slightly more expansionary with clear measures to support investment to jumpstart a new cycle of infrastructure projects in the 15th five-year plan. Contrary to our expectations, the new five-year plan has no numerical target on consumption or the size of the services sector. Scientific and technological advancement and self-reliance remain a key objective.