Europe’s economy is starting to feel pain from Trump’s Iran war

[FRANKFURT] The economic toll of the Iran war is hitting home in Europe, where more muted growth and faster inflation risk deepening industrial, fiscal and political pressures across the region.

US President Donald Trump’s military campaign, whose conclusion remains as unclear as when the first attacks were launched a month ago, is prompting countries to slash their expectations for output while bracing for an energy-driven upswing in prices.

The upshot for the continent, which was just finally shaking off the effects of the conflict in Ukraine, appears to be a partial return to the policy settings used to vanquish that crisis.

This comes as households are offered aid and central banks pivot towards interest-rate hikes.

For companies, while the fallout is already straining resource-hungry sectors – including German chemical makers – there is a growing danger that it will spread more broadly as personal incomes are eroded.

All that will be on the minds of European Union finance ministers convening on Friday (Mar 27). They will be briefed by International Energy Agency chief Fatih Birol in a video call to assess the war’s repercussions and how to better coordinate relief.

Christian Keller, Barclays’ head of economics research, said: “It’s very clearly the energy-intensive sectors that are hurt first and foremost. But the longer it lasts, it will go into every sector, every input price.”

As oil and gas markets push higher and sentiment indicators plunge, Germany and Italy are among the countries weighing cuts to their official growth projections, following a more sombre outlook on Mar 19 from the European Central Bank (ECB).

ECB president Christine Lagarde, in an Economist podcast released on Thursday, said that the current shock “is probably beyond what we can imagine at the moment”.

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This “leads to a sort of a delayed assessment of how serious this current crisis is”.

The German chemical industry – hit hard by the last spike in energy costs in 2022 – has warned of output cuts with the Strait of Hormuz still effectively shut.

Production at the country’s biggest ammonia plant, SKW Piesteritz, has been scaled back to the technical minimum of 85 per cent, while Evonik Industries, a maker of specialty chemicals, is still surveying the damage it may face. 

Evonik chief executive officer Christian Kullmann noted: “It’s still too early to quantify the exact consequences.” However, “Evonik won’t be able to escape the indirect consequences of the hostilities”.

Container shipping line Hapag-Lloyd is facing additional weekly costs of US$40 million to US$50 million for items such as fuel, insurance and storage. The company is trying to recover some expenses through “contingency and emergency charges”, CEO Rolf Habben Jansen added.

Such costs are threatening to cascade through the supply chain, making life more expensive for everyone. Consumers are well aware that the share of households expecting faster price growth over the next year has risen “very strongly”, France’s statistics office said.

Next, the British fashion company, warned it could raise prices between 1.5 and 2 per cent if the war exceeds three months. Sweden’s Hennes & Mauritz said a drawn-out conflict could trigger a spillover from energy that risks curbing consumption. 

The reversal of fortunes in a region that had until recently been looking forward to an economic revival and benign inflation following last year’s trade turmoil could be consequential.

For the eurozone, one question is whether the conflict acts as a spur or an impediment to reforms enabling the bloc to go it alone in a world of crumbling US support and fiercer Chinese competition.

However, funding economic-support measures is also an issue for many countries, with only Germany having meaningful fiscal space.

Antonio Barroso, senior geoeconomics analyst at Bloomberg Economics, said: “Fiscal policy remains the main lever for shielding voters from inflation.

“While economic research favours targeted support to limit incentives for higher energy use, untargeted transfers to wider segments of the population might still be politically appealing for incumbents.”

He added: “However, not all European governments have the fiscal space to pursue such an option.”

The UK, meanwhile, must tap already strained finances to ease cost-of-living struggles that are fuelling populists at both ends of the spectrum. Like the ECB, traders reckon that the Bank of England (BOE) will have to raise borrowing costs.

Andy Haldane, British Chambers of Commerce president and former BOE policymaker, told Bloomberg Television: “The government will have to tread ever so carefully in what it does to extend the net this time round.”

He added: “The room for manoeuvre is very slight, the UK’s very plainly in the sights of markets from a public debt perspective.

“The scope for misstep here speaks to a degree of caution and prudence in how that net is extended much as the political pressures will mount. Now is not the time for bravery.”

A flavour of just how bold Group of Seven policymakers will be is likely to come on Monday as the energy and finance ministers speak virtually.

On Thursday, French finance chief Roland Lescure summed up the scale of the challenge posed by the war: “We’re at the intersection of economic issues, energy issues, inflation (and) central banks.” BLOOMBERG