Households, firms and investors may need to brace for a bout of global stagflation reminiscent of the 1970s, a period of rising prices alongside weak growth, as eurozone private‑sector activity dropped to its lowest in 10 months in March, underscoring growing signs that the conflict in Iran is weighing on the world economy.
Warning signs are already emerging in global data
The data highlight just how significantly the war in Iran is already affecting economic performance across the eurozone.
Similar to the 1970s, stagflation could re-emerge globally, marked by soaring inflation, sluggish growth, and rising unemployment, with oil price shocks playing a central role.
Back then, it affected major developed economies, including the US, Canada, Western Europe, and Japan, effectively bringing an end to the post-war economic boom. Today, that same threat appears to be resurfacing on the horizon.
As I was featured in The Daily Mail, Investing.com, London Loves Business, Trade Arabia, and The Intermediary, amongst others, recent flash PMI figures highlight the changing landscape. Eurozone business activity has slowed significantly, with the headline index barely above the contraction mark at 50.5, down from 51.9 last month.
Meanwhile, cost pressures are climbing at their fastest rate in over three years, driven by soaring energy prices and tightening supply chains.
Rising oil and gas prices are pushing up production and transport costs, which in turn are driving consumer prices higher. At the same time, demand is softening.
This creates a dangerous mix, economic growth is slowing just as inflation is heating up, leaving central banks with very little manoeuvring room to act effectively.
Energy shocks are driving the stagflation risk
Energy markets have tightened quickly as tensions involving Iran have escalated, pushing crude prices higher and causing disruptions to shipping routes.
These supply interruptions are feeding directly into production costs and transport, adding pressure on global energy prices. Europe and Asia, which depend heavily on imported oil and gas, are particularly exposed, leaving businesses vulnerable to sustained price volatility and supply uncertainty.
Investors should be aware that conventional expectations are shifting. Bonds might no longer provide the usual hedge if inflation stays high, while equities could face squeezed margins as rising input costs combine with weaker consumer spending.
Cash erodes in real terms during inflation. Simply doing nothing is not a viable strategy.
The European Central Bank has already flagged weaker growth prospects for 2026, forecasting expansion of less than 1%, while inflation could rise further if energy prices stay high. Surveys show falling business confidence and weaker hiring plans, underscoring that the slowdown is taking hold.
Positioning portfolios for a tougher economic cycle
Preparation is crucial. Portfolios should focus on resilience rather than optimism. Investors may want to increase allocations to assets that tend to perform well during inflationary periods, such as commodities, energy producers, and carefully selected real assets.
For equities, attention should move toward sectors with pricing power and solid balance sheets. Firms that can transfer rising costs to customers without eroding demand are likely to outperform.
Furthermore, currency markets are expected to mirror differences in economic performance and central-bank policy approaches across regions.
Risk-sensitive currencies may face downward pressure, and foreign exchange markets are likely to experience heightened volatility.
In such an environment, diversification across currencies, regions, asset classes, and sectors is critical. Heavy concentration in any one area increases exposure to risk.
Geopolitical tensions are now a key driver of the economic outlook. Ongoing conflict in the Middle East would keep energy markets under pressure, and any further escalation could cause additional supply disruptions.
Moreover, the length of the shock is crucial. A brief disruption can be managed, but sustained high energy prices can fundamentally alter economic trajectories.
Consequently, policymakers face tough choices. Raising interest rates to curb inflation may worsen the slowdown, while cutting rates to stimulate growth could stoke inflation further. Clearly, neither option is simple.
Complacency is the greatest danger. Stagflation isn’t just a theoretical possibility; the early warning signs are already showing in the data.
Investors who take proactive steps, diversify thoughtfully, and focus on real returns rather than nominal gains will be best placed to safeguard and grow their wealth in the challenging period ahead.
To read my previous blog post, click here.