Hormuz relief may not ease the economic toll that’s already ‘baked in,’ analysts warn

Analysts said early signs of reopening the Strait of Hormuz eased the most serious threat to global energy supplies, but warned that the economic damage caused by nearly four months of war would take months to subside.

The United States and Iran signed a memorandum of understanding on Thursday to open the Strait of Hormuz, ending a war that had disrupted global energy supply chains, increased inflation and negatively affected the growth outlook.

But even if shipping through the strait normalizes, high inflation is already largely “baked in” in many economies, Simon MacAdam, deputy global economist at Capital Economics, said in a note this week.

“Higher energy and fertilizer prices could take months to transfer through food supply chains to end consumers,” MacAdam said. He said natural gas prices to households typically lag the upper market by about three months.

Oil prices fell to $80 a barrel on Friday from $118 in March at the height of the war. Goldman Sachs cut its oil price forecast on Tuesday, predicting Brent would average $80 by the end of 2026 and $75 by 2027, citing a faster-than-expected recovery in Persian Gulf crude oil flows.

Higher energy costs and upstream supply disruptions will take longer to feed into the downstream food and energy sectors. The accumulation of ships waiting to pass through the Strait of Hormuz could further delay the full recovery of cargo flows.

Last week the World Bank Reduced global economic growth forecast to 2.5 percentGlobal inflation is expected to rise to 4% this year from 3.3% in 2025, the slowest pace since the pandemic, even as disruptions to oil flows ease in the coming weeks.

It was stated that fertilizer prices may rise up to 38 percent this year due to supply disruptions and shortages of important inputs from the Gulf affecting agricultural markets.

MacAdam said that Europe may face special pressure because natural gas storage levels remain historically low, and he expects inflation in Europe and Japan to increase by another 3 to 4 percentage points as US liquefied natural gas export prices rise.

The European Central Bank became the first major central bank to raise interest rates last week, marking its first tightening move in nearly three years.

Meanwhile, the Fed left under new Chairman Kevin Warsh. short-term interest rates remain unchanged In his statement on Wednesday, he raised his personal consumption expenditures inflation forecast to 3.6% by December from 2.7% in March. Nine out of 18 voting members expect at least one rate hike before the end of this year.

This trend underscores how the Hormuz crisis is changing the calculus of central banks as they try to balance slowing growth against rising inflation.

The Bank of England also maintained its stance Policy interest rates remain unchanged but warned “Even if disputes are resolved immediately, there may be a logistical delay in restarting energy production and transportation.”

Alex Holmes, regional director at the Economist Intelligence Unit, said hawkish central banks were unlikely to reverse course quickly as fuel prices and inflation remained high. Food inflation is also facing additional pressure due to Super El Niño, he said. threatens agricultural production in the coming months.

The crisis has also prompted governments to rethink their energy security strategies. Countries affected by the outage are expected to increase their energy stocks, direct resources to increase domestic production, and pursue alternative supply routes to reduce dependence on a single transit point.

“Ensuring that everyone has a certain level of buffer in peaceful times will provide that buffer even against global contingencies,” Matteo Lanzafame, director of the Asian Development Bank, said at a virtual event on Thursday. he said.