The war with Iran casts a shadow over economic and market prospects that had so far remained solid
16 MAR, 2026
By Michele Morganti
By Michele Morganti, Senior Equity Strategist at Generali AM (part of Generali Investments)
A prolonged escalation of the conflict in the Middle East could trigger a mild recession in Europe and prolong excess inflation. Achieving a ceasefire will be difficult, as Iran will demand considerable concessions.
Only in the event of a prolonged escalation would we expect the ECB to raise rates by up to 50 basis points and the Fed by 25 basis points by the end of 2026.
The high level of uncertainty and the risk of a stagflation crisis are putting the global economy to the test. The EMU and Japan/Asia are particularly vulnerable due to their high energy import dependence. In a base scenario (a war limited to a few weeks with a rapid restoration of oil and gas supply), the recovery in the eurozone would be delayed but not derailed. The United States, as a net energy exporter, is less exposed, although consumer confidence could still be affected.
Risks have increased in recent days; a prolonged escalation of the conflict could trigger a mild recession in Europe and extend the period of excessive inflation. Reaching a ceasefire will be difficult, as Iran will likely demand significant concessions. A unilateral withdrawal by the United States would probably not bring a full return to normality.
In the base scenario, central banks will likely look through the temporary rise in inflation. As a result, the Fed is likely to cut interest rates this year (earlier than currently priced in), while the ECB is expected to keep rates unchanged (compared with the +47 basis points of hikes currently priced in by the market for the end of the year). Only in the case of a prolonged escalation would the ECB raise rates by up to 50 bps and the Fed by 25 bps by the end of 2026.
We see important differences compared with 2022: so far, the energy price shock is more contained, the global economy is in better shape, and central banks — which were very accommodative in 2022 — are already in neutral territory.
Government bonds are not acting as a safe haven; yields look attractive, but not enough for us to reverse our defensive stance on duration (especially in the U.S.). We expect liquid credit to remain resilient. Maintain a prudent overweight in equities, with a bias toward defensive stocks and inflation hedges.
