When the conflict broke out in Iran, the market consensus was for a brief episode with limited impact. Three months later, that story has become blurred: oil remains in tension, inflation is advancing and growth is losing steam, creating an uncomfortable context for risk assets. Paul Hollingsworth (Leamington Spa, United Kingdom, 1990), chief economist of Developed Markets at BNP Paribas and former analyst at the British Treasury, does not buy extreme pessimism. He believes the global economy can still absorb the blow. Of course, he admits that investors’ main concerns are two: the war in the Middle East and artificial intelligencewhich, in his opinion, will generate more jobs than it will destroy.
Ask. June is shaping up to be a key month to reopen the Strait of Hormuz and avoid further economic damage. What do you foresee from now on?
Answer. If on February 28 we had planned that at the beginning of June the Strait of Hormuz would still be closed, we would have expected oil close to $200 and stock markets much lower. However, dampening factors such as the release of strategic reserves have limited the rise in prices. But this situation cannot be maintained indefinitely, because the reserves are finite.
We handle three scenarios. The first, an immediate ceasefire and reopening of the Strait: the price of crude oil could fall below even $70 at first, although it would then adjust somewhat upwards because part of the production will take years to recover. That is, even in the best case scenario, energy prices will be higher than before the crisis. The second, without a war escalation, but with the Strait closed until August: oil could rise to around 140 dollars in the short term and fall towards 85 at the end of the year. The third, an escalation of the conflict: it would cause more damage to infrastructure, prolong the adjustment and maintain high prices for longer, with crude oil potentially reaching $200.
Q. At the beginning of the year the context was clearly favorable for global growth. Is that reading still valid after the geopolitical shock?
R. We start the year with an optimistic view of the global economy. Financing conditions were favorable in many countries, fiscal policy supported economies such as Japan, the United States and Germany, and energy prices were relatively low. The conflict in the Middle East introduces uncertainty, but our forecast continues to be one of resilience. There will be impact, but not a derailment. Important supports continue to exist, such as fiscal policy and structural drivers such as increased defense spending or investment in artificial intelligence. These elements should sustain growth despite the conflict.
Q. In this context, what worries you more right now: inflation or growth?
R. It is a balance, but I would say a little more inflation. We do not believe that the conflict will cause a recession. Yes, it will slow down growth, but we are still far from oil levels associated with a global contraction. The main concern is the rebound in prices. Expectations are rising and companies plan to pass on costs. The risk is that these pressures will intensify.
Q. How do you see the evolution of inflation in Europe and the United States?
R. In both cases we expect inflation to pick up. For the eurozone, we estimate a 3% this year and also around 3% next. The rise in energy prices will gradually be transferred to other goods and services such as food. Then the so-called second round effects will arrive. That is, increases in salaries and more prices in general. All this will mean that inflation will remain high next year as well. In the case of the United States, we forecast inflation of 3.8%, more persistent due to greater economic dynamism.
Q. With inflation above target, will the Fed be able to cut rates?
R. Our current forecast is for the Fed to keep rates unchanged. We already started the year expecting the price of money to remain stable, while the market anticipated cuts. We did not believe that the economy justified a rate cut. Before the outbreak of war, inflation in Europe was close to 2%, which practically meant having met the ECB’s objective. In contrast, the US never returned to 2% and the Fed did not expect to do so for several years, so the starting point was higher inflation.
In addition, the labor market remains very tight. Late last year and early this year, there was concern that job creation was moderating. However, part of this is due to a lower supply of labor, for example, due to the drop in immigration. Thus, although employment growth is lower than after the pandemic, the labor market remains solid.
Q. And in the case of the ECB?
R. We anticipate a total increase of 50 basis points. That is, two increases of 25 basis points. The first in June and the second in September. We believe that the June movement could be interpreted as an “insurance” increase to prevent some inflationary risks from being transferred to the economy.
Q. Raising rates in this context is reminiscent of 2008 or 2011. Is there a risk of repeating those mistakes?
R. We don’t believe it. One or two rate hikes shouldn’t cause a recession. The economy is quite resilient. Raising rates slightly, starting from a neutral level, would help contain inflationary pressures and avoid stronger second-round effects that would require action later. In this context, a total increase of 50 basis points seems to us to be a reasonable and proportionate response to the magnitude of the observed shock.
Q. They point to weaker growth, although without recession. Have you had to revise your forecasts downwards?
R. Yes. We expect growth for the euro zone of 1% this year, compared to the 1.6% we estimated before the start of the war. But not all of this downward revision is due to the conflict in the Middle East. Growth in the first quarter, even before the shock, was somewhat weaker than expected. Added to this is that the rise in energy prices reduces the real purchasing power of consumers. It also influences that we expected a greater impact from defense spending on infrastructure in Germany, something that uncertainty is limiting. In the case of the US, our estimates point to an increase of 2.4% this year.
Q. In this environment, do you see tensions in the market? What could make them appear?
R. The macro situation continues to be favorable for risk assets such as the stock market or credit. We would only see tensions if there is a more pronounced change in rate expectations. For now, some adjustment is discounted—between two and three increases by the ECB and at most one in the US—but not a complete cycle.
Q. With rates high for longer and uncertainty high, where do you identify opportunities in fixed income and equities today?
R. In fixed income, we expect rising returns and a certain steepening of the curves. High deficits, uncertainty and central bank balance sheet reduction point to higher rates for longer, especially in long tranches. We see opportunities in segments like the British public debtalthough with inflationary and political risks.
In equities, we see potential in Europe. Investors’ skepticism and underweighting leave room for better performance if the environment improves, further supported by attractive valuations.
Q. The IPOs of SpaceX or Anthropic have revived the debate about market concentration in the US. To what extent is it a risk to depend on a few companies?
R. More than a risk in itself, what we see is that it complicates the analysis. Traditionally, macro perspectives could be transferred to the equity market and now this is much more thematic or dependent on specific companies.
Q. Do you see artificial intelligence more as a threat or as an economic driver?
R. We are optimistic. Faced with the consensus, which anticipates job destruction, we believe that there will be disruptions, but not a significant increase in unemployment. Business investment and consumption driven by the wealth effect are already generating activity. Furthermore, as in previous technological revolutions, new jobs will emerge. Even tools that seemed like substitutes—like Excel at the time—ended up expanding the demand for certain profiles.
We also do not share the idea that AI will be disinflationary in the short term. Demand effects will arrive before supply effects, generating inflationary pressures. It is observed in the rising cost of chips, energy or the growing demand for computing capacity. Therefore, we do not think that AI will justify rate cuts.
