The US-Iran conflict causes global stock market turbulence, international oil prices surge by 60%, and the S&P warns: Long-term oil supply shocks could trigger a global recession.

Ask AI · Could the supply shock caused by the U.S.-Iran conflict trigger a global economic recession?

Reporter | Zhou Rui; Intern reporter Lin Qianwei

Editor | He Jia, Zeng Jingjiao, Li Yingliang

Against the backdrop of the situation in the Middle East continuing to escalate, volatility in global financial markets has increased significantly. According to Xinhua News Agency, Beijing time on April 8, the U.S.-Iran side announced that they have agreed to a temporary ceasefire. International oil prices fell sharply. As of 10:25 a.m., New York futures crude oil was at $96.2 per barrel, down 14.8% on the day. Brent crude was $94.9 per barrel, down more than 13% on the day.

In terms of the stock market, all three major U.S. stock index futures were up across the board. Asia-Pacific equities opened higher across the board. Japan and South Korea’s indices rose by more than 5%. Meanwhile, gains in China A-shares and Hong Kong stocks continued to expand further.

Since the outbreak of the U.S.-Iran conflict, New York futures crude has risen cumulatively by more than 60%, while the Dow has fallen by nearly 5% cumulatively. South Korea’s composite index has dropped by more than 10%, and Japan’s Nikkei 225 recorded its worst monthly performance since 2008.

Analysts said that recently, the linkage between stock-market performance and oil prices has become significantly stronger. The “oil-price-driven market” feature is increasingly evident. And once energy supply remains constrained, the high-oil-price environment will weigh on the global economy through multiple channels, including corporate costs, consumer spending, and inflation expectations.

Against this backdrop, the market is reassessing the nature of the current shock: Is this round of shock caused by an interruption in energy supply merely a short-term disruption, or could it evolve into a broader macroeconomic turning point? Between the Federal Reserve’s inflation pressure rebounding and growth uncertainty intensifying, how will it weigh its policy path? Is the global economy moving from “recovery” toward “rebalancing,” or even “slowdown”?

To address these key questions, a Nanfang Finance reporter conducted an exclusive interview with Paul Gruenwald, Chief Economist at S&P Global. In the interview, he clearly defined the current situation as a typical “supply shock,” and systematically analyzed its differentiated impact on different economies, its constraints on the pace of monetary policy, and the potential stage-by-stage risk paths the global economy may face.

Paul Gruenwald. Photo/illustration

Financial market volatility intensifies, and the “oil-price-driven” feature stands out

Nanfang Finance: The current economic situation is very complex, and the market increasingly believes that the U.S. is currently in a stagflation scenario—right? So what is S&P’s baseline scenario?

Paul Gruenwald: We’ve just released the latest scenario analysis, so our judgment is based on the latest one. This is a supply shock. A supply shock means output falls and inflation rises. Therefore, I’m not sure it can be simply defined as stagflation, but our forecast is that this year inflation in the U.S. will rise noticeably, potentially reaching 4%. The size of the shock to output depends on the type of country. If it’s an energy-exporting country, the impact may not be too severe. If it’s an energy-importing country and lacks inventories or reserves, these countries face the greatest risks. At present, this is still a supply shock, mainly concentrated in the Asia-Pacific region and in large energy-importing countries.

Changes in the U.S. labor market structure: jobs are “steady,” but the foundation is narrowing

Nanfang Finance: With the release of the recent ADP employment data, how do you view the U.S. labor market?

Paul Gruenwald: The U.S. labor market has already undergone major changes. Our current estimate is that to keep the unemployment rate stable, the U.S. only needs to add about 30k jobs per month. In the past, that figure was about 150k, because immigration has basically declined, and there are not many foreign students or other workers entering the U.S. anymore. As a result, the number of additional jobs required to stabilize the job market has fallen significantly. However, at present, only one sector is truly driving employment growth: healthcare. The technology sector is declining, government departments are declining, manufacturing is declining, and education is basically flat. Therefore, overall, employment conditions are still fairly good, and the unemployment rate is relatively low, around 4.3% to 4.4%. But the foundation for job growth is very narrow, and that in itself is a risk factor.

Nanfang Finance: The market believes the current situation is one where there are neither “hiring” nor “layoffs”—do you agree?

Paul Gruenwald: Yes. Usually, the labor market has what we call “liquidity,” meaning employees quitting and companies hiring new staff. After the pandemic, this liquidity was once very high, but now it has narrowed significantly. Company hiring has clearly decreased, while employee quit rates have also been declining. In other words, labor market labor mobility is, essentially, contracting. This means the foundation for economic growth is becoming even narrower—now clearly below trend or normal levels.

Macroeconomic uncertainty rises, and the market revalues the policy path

Nanfang Finance: When the Federal Reserve sets policy, it pays attention to both inflation and employment. Also, Chair Powell’s term will end in May, and the new chair is about to take office. Do you think the Federal Reserve’s basic policy path will change?

Paul Gruenwald: The Federal Reserve makes decisions through a committee process, with 12 voting members in total. The chair does have a very big influence, and we need to observe Kevin Warsh’s performance. But he is taking over a Federal Reserve that still places a high focus on inflation. Currently, the Federal Reserve is on an interest-rate-cut path, but obviously it is not in a rush to cut rates. The U.S. economy overall is in good shape. If the economy remains steady and inflation is still above target, then even if there is room for rate cuts, the pace of cuts will likely be slower. In addition, uncertainty stemming from the Middle East conflict means that we believe not only the Federal Reserve, but central banks around the world are in a wait-and-see stance. If factors such as oil prices continue to push inflation upward, central banks in various countries will not easily implement aggressive rate cuts.

Nanfang Finance: Do you still think there will be rate cuts this year? If so, what magnitude do you expect?

Paul Gruenwald: Our current baseline scenario is that there will be only one rate cut remaining. Previously, we expected two rate cuts in the second half of the year. We already believed that in the first half of this year the Federal Reserve would stand pat, and this tendency to hold steady has become even more obvious. We still keep a forecast for one rate cut, but that premise is that the Middle East conflict can be resolved relatively quickly, the situation stabilizes, and inflation starts to fall back. If the duration and impact of the shock are longer and larger, then it is very likely that there will be no rate cuts this year.

Energy shock transmission: from supply disruptions to global market risk

Nanfang Finance: With the risks in the Middle East still high, have you incorporated scenarios like oil price shocks in your model?

Paul Gruenwald: Yes. Within S&P Global, we have an energy team. They do an excellent job tracking developments and have built a three-stage model. The first stage is the so-called “flow stage”—after the Strait of Hormuz is closed, the oil and gas that are already in transit are still being delivered. This stage has already ended because these ships have arrived at their destinations.

Now we move into the second stage, which is the supply-shock stage. If you are an oil and gas producer, this situation is favorable. If not, you either rely on inventories or you move into the currently very expensive spot market. We have lost about 15% of oil supply and 20% of natural gas supply, so prices will rise, while demand will be forced to fall in order to match supply, unless supply recovers. We are currently in this stage.

The third stage—the most severe one—is when it evolves into a global market crisis. If this situation lasts longer and demand is compressed significantly, the market will cut its growth expectations, profit expectations, and expenditure expectations. Then you will see things like market selloffs, de-risking, and capital flows toward the U.S. dollar. Consumers will reduce spending, and companies will reduce investment, leading to a slowdown in the global economy and even a recession. We have not entered this stage yet, but the next step in risk will shift from real-economy supply shocks to financial-market shocks.

Nanfang Finance: The global economy has experienced energy or crisis shocks in 2008, 2020, and 2022. What’s different this time?

Paul Gruenwald: These situations are different in each case. In 2008, it was a global financial crisis centered on the United States. In 2020, it was the global pandemic. And this time it is a supply shock. The Strait of Hormuz has never truly been closed before; it’s a very special event. Although this scenario has been mentioned multiple times, it is still rarely seen when it actually happens. Today, global dependence on energy is lower than in the 1970s. The economy is more diversified, productivity is higher, and the U.S. is in a more advantageous position. Back then, the U.S. was a major energy-importing country. Therefore, we need to reexamine the global landscape—look at which countries produce energy, which rely on imports, and which have inventories. In Asia, China, Japan, and South Korea are currently in relatively better shape because they have built strategic reserves that can support them for a few months. Although reserves are not infinite, they provide a buffer in the short term.

Nanfang Finance: Your team released a scenario called an “economic severe downturn.” What are the specific triggers for this scenario?

Paul Gruenwald: That scenario is at the market level. If the situation evolves from a regional supply shock into a global market shock, we will enter this stage. But the prerequisite is that the market forms a judgment that there won’t be a quick recovery, and that the impact will be global, even if the strait closure lasts longer. There are disagreements between technical staff and financial professionals. Technical staff believe it will take longer to restore supply, including restoring production, reallocating ships, and transporting energy. This is not like turning a faucet on or off at any moment. It is a complex supply-chain process. We also currently see that Iraq and Kuwait have paused some production, and this needs to be restored step by step before oil can be loaded onto ships and transported. This is a physical process, not a simple financial one.

Nanfang Finance: In addition to the risks that the market is already paying attention to, are there any tail risks you think the market is currently underestimating?

Paul Gruenwald: I think the worst scenario is the one we just described—the severity is still uncertain. However, when we get into 2026, there are also some positive factors. For example, investment in artificial intelligence and data centers continues. This isn’t only a U.S. investment story; it’s also an export opportunity for Thailand, Vietnam, Mexico, and parts of India. Financial conditions overall remain relatively loose. Although U.S. Treasury yields have risen and credit spreads have widened somewhat, they are still below the historical average. The only favorable factor that has disappeared is low energy prices. Now energy prices have risen, and there is a supply shock. The interaction among these factors will have an important impact on the next few quarters.

Nanfang Finance: Is the U.S.’s high-debt problem still a risk worth watching now?

Paul Gruenwald: Yes. An energy crisis doesn’t necessarily automatically translate into higher end prices, because governments can cushion the impact through subsidies, or require energy companies to compress profits, or pass the costs on to consumers—similar to how tariff mechanisms transmit costs. If the government chooses to subsidize, then debt increases. If it does not subsidize, the costs will be passed on to consumers, which brings inflation problems—an outcome that everyone would rather avoid.

Nanfang Finance: If we get specific about China, how does S&P view China’s economic growth path this year?

Paul Gruenwald: Our growth expectation for China this year is about 4.5%. Structural issues still exist, such as excessive real estate investment, but China’s performance in exports of clean energy, batteries, electric vehicles, and photovoltaics has been strong. In addition, although China is not an energy-producing country, it has a large amount of inventory, which means it has a certain buffer capacity relative to others. In the future, the importance of energy security will increase, and countries will place more emphasis on energy self-sufficiency.

Nanfang Finance: What is S&P’s overall outlook for the global economy?

Paul Gruenwald: Overall, global economic growth is expected to remain at around 3.25% in the long run. The main factors that can significantly affect global growth are the U.S., the EU, and China—these three account for about 20% each, totaling close to two-thirds. If China maintains growth of around 4.5% and the U.S. and Europe don’t change much, then global growth overall won’t change too dramatically. Of course, if we enter a market-shock stage, global growth will decline.

SFC

Produced by | 21 Finance App (21st Century Business Herald)