Europe’s economy 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 themselves for an energy-driven upswing in prices.

The upshot for a continent that 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 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 it will spread more broadly as personal incomes are eroded.

“It’s very clearly the energy-intensive sectors that are hurt first and foremost,” said Mr Christian Keller, head of economics research at Barclays. “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 countries weighing cuts to their official growth projections, following a more sombre outlook last week from the European Central Bank (ECB). 

The current shock “is probably beyond what we can imagine at the moment”, ECB president Christine Lagarde said in an Economist podcast released on March 26. 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 speciality chemicals, is still surveying the damage it may face. 

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

Container shipper Hapag-Lloyd is facing additional weekly costs of US$40 million (S$51.4 million) to US$50 million for things like fuel, insurance and storage. The company is trying to recover some through “contingency and emergency charges”, CEO Rolf Habben Jansen said. 

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

British fashion company Next warned it could raise prices between 1.5 per cent and 2 per cent if the war exceeds three months. Sweden’s H&M 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 2025’s trade turmoil could be consequential.

For the euro zone, 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. Funding economic-support measures is also an issue for many countries, with only Germany having meaningful fiscal space.

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

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

“The room for manoeuvre is very slight, Britain’s very plainly in the sights of markets from a public debt perspective,” he said. “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.” BLOOMBERG