Simply Put: Global Economy After the US-Iran War
By Florian Ielpo, Head of Macro
Summary:
- The US-Iran war unleashed in late February 2026 acts as a global supply shock and a test for fiscal sustainability.
- Academic research confirms that wars temporarily boost GDP and public demand, but lead to inflation and private capital displacement.
- The positive effects are usually localized – defense, energy, small caps – but come with a rise in stagflationary risk.
Florian Ielpo
The US and Israel’s war against Iran on February 28, 2026 plunged the global economy into a new phase of uncertainty, extending far beyond just the energy dimension. The Strait of Hormuz, a crucial passage for a fifth of the world’s oil, has become a major strategic flashpoint. Immediate consequences included a 60% surge in oil prices, a 40 basis point rise in US interest rates within weeks, and stock market corrections ranging from 5 to 8% depending on the indices. Despite starting the crisis in a balanced state, the US economy faced a growth rate of 2% and a PCE inflation of 2.8%. Should we really be concerned about the war’s effects on the US economy? This is the question Simply Put asks this week.
A Critical Fiscal Engine
For the past 120 years, the US has experienced ten major wars, each leaving a distinct macroeconomic footprint – total mobilization (1939-45), overheating (Vietnam), or brief shocks (Gulf War 1991). History shows that longer and more intense wars lead to sustained increases in debt and subsequent inflation. The section on the Congressional Budget Office’s archives depicts how during these phases, the MacFadden R² linking credit ratings and sovereign spreads peaks after 24 months, indicating that markets can tolerate financial imbalances for a limited period.
Source: LOIM, Congressional Budget Office
The most costly wars do not necessarily cause the most market pain – the Afghan conflict, long and less publicized, only mildly impacted rates, while Vietnam and the Gulf saw sharp increases in risk premiums up to 50 basis points. What effects have we actually seen on the key variables driving the US economy?
Looking beyond the current context, historical data on US financial markets exhibit almost mechanical behavior following wartime entry. The impact of conflicts on financial markets follows a well-identified three-phase sequence: an initial shock period (0-3 months) marked by high volatility, a significant decline in risky assets, and a surge in commodities as geopolitical risks assess; an adjustment phase (3-6 months) characterized by rising sovereign rates, relative stock stabilization but increased credit spreads pressure; and a macroeconomic phase (6-12 months) revealing growth slowdown, inflation peaks, and early recoveries in defensive and small-cap stocks – all while the stock-bond correlation remains slightly positive, typically peaking after four years, as observed on the 1920-2025 period.
Post-conflict reactions of major financial indicators (1919-2025) confirm the aforementioned three distinct phases:
- In the short term (3 months), high volatility sees a significant stock decline (-7.3%), commodity surge (gold +5.2%, oil +17.6%), and a sovereign rate uptick (+0.19%);
- During the intermediate adjustment phase (6 months), markets stabilize partially with a moderation in stock index declines (-5.6%) but continued rate pressures (+0.27%);
- Long-term effects (12 months) emphasize macroeconomic impacts, with a persistent negative GDP deviation from its trend (-1.4 percentage points) and a gradual normalization of credit spreads (-0.04%) – aligning with existing literature observations.
Global growth forecasts: long-term evolution (left) and recent (right)
Current global inflation outlook: long-term evolution (left) and recent (right)
Current global monetary policy forecasts: long-term evolution (left) and recent (right)
In simple terms, the Iranian war acts as a global energy shock: it supports sector profits but weakens overall growth. In 2026, the US will be more armed than wealthy, more inflationary than prosperous.
Macro/Nowcasting Corner
This section presents the latest evolution of our nowcasting indicators for global growth, surprises in global inflation, and global monetary policy surprises. These indicators track the most recent macroeconomic developments affecting markets.
Our nowcasting indicators currently show:
- Our global growth nowcaster declined this week, mainly due to the Eurozone, where the regime shifted from high and rising to weak and rising. Consumption and employment data deteriorated in this region. China was the only area where the signal slightly improved.
- Our inflation indicator surged, crossing the 50% threshold, except for China where it remained unchanged.
- Our global monetary policy signal remained largely stable. A hike in the US was offset by a signal decrease in the Eurozone.
