The implications of a renewed closure of the Strait

The global economy has so far weathered the energy shock created by the war in Iran, but a sharp drawdown in oil inventories has left stocks close to critically low levels. The oil market therefore has much less capacity to absorb another supply shock. A prolonged closure of the Strait of Hormuz would probably trigger another surge in oil prices, pushing inflation in most DMs to at least 5% y/y, slowing US GDP growth towards 1%, bringing the euro-zone close to recession, and prompting major central banks to raise interest rates. Even so, the economic outcomes in this adverse scenario are still not quite as bad as some of the more bearish forecasts that have been published in recent weeks.