WEFC | ‘Hammer’ Hits ‘Strait’ On — But Straight to What End? [PDF Download] | Blog

The recent escalation in U.S.–Iran tensions, marked by a direct American strike on Iranian nuclear sites, has triggered profound global repercussions. From energy market volatility and heightened inflation risks to diverging central bank policies and renewed trade conflicts, the world now faces a rapidly shifting geopolitical and economic landscape. This week's WEFC outlines four key developments shaping the global outlook—each with far-reaching implications for energy security, monetary policy, trade dynamics, and emerging trends.

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1. Strait of Hormuz: Global Energy Lifeline Under Threat

The U.S. strike on Iranian nuclear facilities has reignited fears over the Strait of Hormuz, a critical chokepoint for 25% of global seaborne oil and 20% of LNG trade. Though Iran has historically used threats over closure as leverage without acting, any real disruption would cause severe supply shocks, particularly in Asia. Limited alternative routes highlight the world's structural dependency on this narrow passage. While actual closure probability remains low, market behavior—such as a sharp oil price spike and extreme WTI backwardation—reflects acute concern over immediate supply disruptions and inflationary ripple effects.

2. Central Banks Diverge Amid Geopolitical and Inflation Pressures

Global central banks are navigating diverging paths in response to inflation, tariffs, and geopolitical instability. The U.S. Federal Reserve maintains a cautious stance, projecting fewer rate cuts amid rising core inflation. In contrast, the Swiss National Bank has slashed rates to zero, battling imported deflation from a strong franc. The Bank of Japan tightens liquidity through balance sheet reduction despite rate stability, while the BoE remains split over persistent inflation and weakening labor markets. This fragmentation marks the most significant divergence since 2008, complicating global financial coordination and prolonging restrictive borrowing conditions for 2025.

3. Trade Stalemate with EU and Japan Risks Economic Recovery

U.S. trade tensions with the EU and Japan have escalated due to aggressive tariff threats, particularly on autos and pharmaceuticals. However, deeply integrated supply chains render these threats self-damaging, as U.S. consumers and workers would bear rising costs. Japan faces political constraints ahead of elections, limiting its ability to make agricultural concessions. The EU's institutional rigidity and internal divisions further slow negotiation progress. This trilateral gridlock undermines global recovery prospects by stalling critical trade flows and investment decisions, while benefiting third-party economies like Mexico. Structural miscalculations in policy threaten to prolong uncertainty well into late 2025.

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