Seven weeks into the war in the Middle East, the global economy is inching closer to the kind of growth-plus-inflation trap last seen in the 1970s, and policymakers are bracing for a second round of evidence this week. Flash April purchasing managers’ indexes (PMIs) covering Australia, Japan, the euro zone, the UK and the United States land on Thursday and will show whether the combined blow to growth and the push to prices seen in March has deepened or stabilised. The International Monetary Fund has already cut its 2026 global growth forecast to 3.1 percent while lifting the headline inflation projection to 4.4 percent, warning of a “severe” scenario in which the world economy comes uncomfortably close to recession. Central banks from the Federal Reserve and European Central Bank (ECB) to the Turkish central bank and the South African Reserve Bank are trying to parse conflicting signals, while US President Donald Trump’s pick to succeed Federal Reserve Chair Jerome Powell, Kevin Warsh, appears before the Senate Banking Committee on Tuesday in what is shaping up as the most-watched Fed confirmation hearing in decades. The takeaway: the Middle East ceasefire may be in sight, but the economic scars are already “baked in,” as IMF chief Kristalina Georgieva has put it.
Key Overview
- Seven weeks of war in the Middle East has combined a growth shock with an inflation shock, reviving 1970s-style stagflation risks across advanced and emerging economies.
- Flash April PMIs for Australia, Japan, the euro zone, the UK and the US are published on Thursday and are expected to show broad deterioration in Europe, with US indicators little changed.
- The IMF’s April 2026 World Economic Outlook cuts 2026 global growth to 3.1 percent and lifts headline inflation to 4.4 percent; an “adverse” scenario pushes growth down to 2.5 percent and inflation to 5.4 percent.
- ECB chief economist Philip Lane has signalled caution ahead of the bank’s next rate decision, telling Washington audiences that survey respondents “are looking at the same world we are looking at.”
- Kevin Warsh, Trump’s Fed chair nominee, testifies before the Senate Banking Committee on Tuesday and will face questions on independence, rate cuts and his $100+ million in personal financial holdings.
- Turkey’s central bank is expected to hold its main rate at 37 percent for a second straight meeting as war-driven energy prices threaten its disinflation path.
- Inflation data from the UK, Canada, South Africa and parts of Asia — plus rate decisions from Indonesia, the Philippines, Turkey and Russia — will test how fast the oil shock is feeding through globally.
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A Second Wave of Data Meets a Stagflationary Scare
After a March that produced the first clear evidence of a dual growth-and-price hit from the war in the Middle East, policymakers are now waiting for the April reading. As Bloomberg’s Craig Stirling reported in a syndicated preview, the flash PMIs for the euro zone, Germany, France and the UK are forecast to show broad deterioration, while American indicators are seen holding roughly steady — a divergence that reflects Europe’s greater exposure to imported energy.
The stagflation framing is not being retrofitted by commentators. It came, explicitly, from the PMI compiler itself. Chris Williamson, chief business economist at S&P Global Market Intelligence, told subscribers that March’s flash euro-zone reading was ringing stagflation alarm bells as the war drove input prices up at the fastest pace since February 2023 while output growth slowed to near-stagnation. The euro-zone composite PMI dropped from 51.9 in February to 50.5 in March, according to CNBC’s reporting of the flash release, brushing the 50-point frontier that separates expansion from contraction.
The US did not escape. S&P Global’s flash US services PMI fell to 51.1, its weakest reading since April 2025, and employment fell for the first time in more than a year, with Williamson noting that price gauges point to inflation heading back toward 4 percent even as GDP momentum slowed toward an annualised 1 percent.
IMF: “Even Our Most Hopeful Scenario Involves a Growth Downgrade”
The IMF’s Spring Meetings in Washington last week crystallised the macro picture. Managing Director Kristalina Georgieva used her curtain-raiser speech to argue that “had it not been for this shock, we would have been upgrading global growth,” but that now even the most hopeful scenario involves a downgrade because of infrastructure damage, supply disruptions and loss of confidence. In a Bloomberg Television interview quoted in the Bloomberg preview, Georgieva warned that even if hostilities end tomorrow, “the impact is already baked in.”
The IMF’s April 2026 World Economic Outlook — subtitled “Global Economy in the Shadow of War” — marks down 2026 growth to 3.1 percent and lifts global headline inflation to 4.4 percent in its reference case, an assumption that, crucially, pencils in a moderate 19 percent rise in energy prices and a short conflict. In its own press briefing, the Fund sketched a harsher path: an adverse scenario drops global growth to 2.5 percent and pushes inflation to 5.4 percent, while a severe scenario, involving energy-supply disruptions that stretch into 2027, would shave 1.3 percentage points off 2026 global growth — the kind of move that typically marks “a close call for a global recession,” a bar the world economy has only breached four times in the modern era.
Emerging markets bear a disproportionate share of the hit. The IMF cut its 2026 forecast for emerging markets to 3.9 percent from 4.2 percent in January, and commodity-importing developing economies with pre-existing fragilities are carrying the heaviest burden, according to the IMF’s own Executive Summary.
ECB’s Lane Plays It Cool
Even against that backdrop, monetary policymakers are refusing to be hurried. ECB chief economist Philip Lane, speaking on the sidelines of the Spring Meetings, told reporters that the governing council will sift through a “rich set of survey data” before its rate decision later this month. Of the PMIs in particular, Lane noted that the people filling them in “are looking at the same world we are looking at” — a polite way of saying that business surveys mostly reflect the shock rather than add new information to it. The ECB in its last round of forecasts cut the bloc’s 2026 growth projection to 0.9 percent while lifting headline inflation to 2.6 percent.
ECB President Christine Lagarde is on the schedule to speak before the governing council’s pre-decision quiet period kicks in, while German business surveys — including the closely watched Ifo climate gauge on Friday and French business confidence on Thursday — will help anchor that call.
Warsh on the Hot Seat
The most politically charged central-bank story of the week is unfolding in Washington, where former Fed governor Kevin Warsh appears before the Senate Banking Committee on Tuesday for what CNN has called the most anticipated Fed chair confirmation hearing in decades. In remarks prepared for the hearing, Warsh said the central bank must be largely independent of political influence but must also “stay in its lane,” a familiar critique of what he sees as past Fed overreach into fiscal and social policy.
The politics are delicate. Trump has publicly demanded lower rates even as the war pushes inflation higher, and Warsh has historically been more hawkish than Jerome Powell, whose term expires in May. Warsh’s confirmation is also being complicated by a stand-off over North Carolina Republican Thom Tillis, who has vowed to vote against any Fed nominee until the Justice Department drops its investigation into Powell over a Fed headquarters renovation project. Senators will also press Warsh on his disclosed $100 million-plus in personal assets, including holdings linked to his wife Jane Lauder, the Estée Lauder heir.
For markets, Warsh’s messaging matters as much as his confirmation math. The US preliminary University of Michigan consumer sentiment reading for April set a record low, and the final print lands at the end of the week, alongside retail-sales data expected to show a headline boost from pricier March gasoline fills even as drivers, paying around $4 a gallon, cut back elsewhere.
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Turkey, South Africa and the Emerging-Market Squeeze
For open economies running stubborn inflation and fragile currencies, the war has been particularly unforgiving. Turkey’s central bank, which had cut rates for five consecutive meetings before pausing in March, is widely expected to hold the one-week repo rate at 37 percent again on Wednesday, even as three of 11 economists surveyed by Bloomberg predicted a 300-basis-point hike to defend the lira. A weaker currency imports more inflation through energy, and Turkey has been forced to suspend weekly repo auctions and push effective bank funding to 40 percent via its overnight lending facility. The World Bank has already cut Turkey’s 2026 growth forecast to 2.8 percent from 3.7 percent, citing the Iran-war-driven surge in energy and food prices.
In South Africa, Reserve Bank Governor Lesetja Kganyago speaks on Tuesday at the release of the Monetary Policy Review and again on Wednesday at a roadshow, with the first post-conflict inflation print — expected to tick up to 3.1 percent from 3 percent — landing the same day. Asia’s list of data is just as telling: Indonesia’s rate decision on Wednesday, the Philippines central bank expected to hike 25 basis points to 4.5 percent, New Zealand’s first-quarter CPI on Tuesday, and PMI and inflation readings from Australia, Japan, India, Singapore and Hong Kong later in the week.
Russia rounds off Friday’s calendar with its own central-bank decision, with policymakers weighing whether to keep easing amid war-driven inflation uncertainty.
The UK Crisis Backdrop and Canada’s Gas-Driven Jump
The UK gets a full stress test this week at a particularly painful moment for Prime Minister Keir Starmer’s government. Labour-market data on Tuesday may reveal pay pressures softening in the three months to February — a reading that predates the war — while headline inflation is expected to jump to 3.3 percent in March from 3 percent, largely because of the Iran-conflict-driven rise in energy prices.
Canada’s story is similar. Economists expect headline inflation to jump to 2.6 percent in March from 1.8 percent, driven by gasoline, even as food inflation eases modestly as a 2025 sales-tax-holiday base effect rolls out. The Bank of Canada’s business outlook and consumer expectations surveys for Q1 will test how firms and households see the oil shock shaping investment and labour markets.
Ceasefire but Scars
Bloomberg Economics analysts Jennifer Welch and Adam Farrar, quoted in the original Bloomberg preview, cautioned that while a US-Iran deal appears to be in sight, “it’s unlikely to result in a full or lasting peace.” Israel is not a party to the negotiations and continues to regard Iran as a threat, and the two sides already appear to be interpreting key terms — including over the Strait of Hormuz — differently.
Meanwhile, the economic damage is accumulating. Israel’s own economy shrank 3.5 percent in Q2 2025 in the aftermath of a shorter earlier episode, according to preliminary data from the country’s Central Bureau of Statistics reported in August, underscoring how even “limited” regional wars can tear through GDP. And the International Energy Agency has characterised the disruption — including the partial closure of the Strait of Hormuz — as the largest supply disruption in the history of the global oil market, a framing that helps explain why the IMF reference scenario still assumes a painful 19 percent rise in global energy prices through 2026.
Georgieva’s own phrasing captured the policymaker mood. “We all need to learn to operate in an environment of high and permanent uncertainty,” she told Bloomberg Television. That is a sober framing for a week in which Thursday’s PMIs will, for better or worse, quantify just how much permanence that uncertainty is already building into the global economy.
Latin America: The Quiet Corner — For Now
Away from the headlines, Latin America’s two smaller inflation-targeters are meeting this week. Uruguay’s central bank, which has cut rates at seven straight meetings to 5.75 percent, is deliberating with inflation at a near seven-decade low of 2.94 percent in March. Paraguay’s central bank held at 5.5 percent in March after two quarter-point cuts and will be assessing an even softer print of 1.9 percent. Colombia’s February GDP-proxy data may show a modest rebound, though analysts have been marking down 2026 forecasts, and Argentina’s GDP data will likely again highlight the uneven split between booming energy and mining and sputtering construction and manufacturing. Mexico’s February activity data, alongside early-April CPI figures, will help investors judge the wisdom of Banxico’s quarter-point rate cut last month in a world where elevated inflation may prove to be less supply-driven and temporary than once hoped.
What It All Adds Up To
None of the week’s individual data points is, in isolation, decisive. But together they will test the market’s pricing of a stagflationary regime. Polymarket traders, according to Benzinga, now assign a 31.2 percent probability to zero Fed rate cuts in 2026, a near coin-flip to US inflation breaching 4 percent, and a 35 percent chance of a US recession by year-end — a sharp reversal from expectations just weeks earlier.
If the April PMIs confirm that Europe is sliding further into stagnation while prices keep climbing, central banks will face the most uncomfortable version of their mandate: choose between fighting inflation into a downturn or cutting rates into a supply shock. Neither is a good option. It is, as the IMF’s Georgieva put it, a world where even ending the war tomorrow would not end the pain.
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