The European Commission has downgraded its growth forecast for the European Union to 1.1% for 2026, while raising its inflation projection to 3.1%, as the war in Iran and the closure of the Strait of Hormuz inflict a severe energy shock on the continent. Valdis Dombrovskis, the EU's economy commissioner, described the conflict as an additional test for a bloc already navigating a volatile geopolitical and trade environment. The revision marks a full percentage point increase in expected inflation compared to the Commission's November projections, underscoring the persistent pressure on households and businesses.

Germany, the EU's largest economy, is bearing the brunt of the crisis. The Bundesbank warned in its monthly report that the fallout from the war would push the country into recession in the second quarter of the year, with inflation having already climbed to 2.9% in April — its highest since January 2024. The central bank noted that the magnitude of the economic damage depends critically on the duration of the conflict, but cautioned that price pressures would remain elevated in the coming months.

Across the Atlantic, the picture is more contradictory. While US GDP continues to grow robustly — the economy is valued at $31 trillion — the war has driven oil and gas prices to four-year highs, erasing the income gains Americans made over the past year. Consumer confidence has fallen to an all-time low, and households are spending an extra $20 billion on fuel. Yet, so far, the conflict has not tangibly altered spending habits or employment, though analysts note that the prolonged closure of the Strait of Hormuz could push the most vulnerable to a breaking point. Meanwhile, the global bond market, long considered a safe haven, is showing signs of strain, with over $50 trillion in sovereign debt under pressure as inflation expectations reset.

Italy, in contrast, has shown relative resilience. The national statistics institute Istat reported that GDP growth for 2026 is expected to hold at 0.5%, unchanged from the previous year, and that the labour market continues to expand. But even Italy is not immune: a survey of euro zone activity showed the sharpest contraction in the services sector in two-and-a-half years, as input price inflation reached a 3.5-year high. Economists caution that while the current situation does not yet mirror the stagflation of the 1970s, it is exacerbating the cost-of-living crisis that millions of households have faced since the pandemic.

Looking ahead, the trajectory of the global economy hinges on the Strait of Hormuz. Iran's ability to control this chokepoint has given it economic leverage, and some analysts suggest that only Chinese mediation — and a shift in US rhetoric — can avert a broader catastrophe. With infrastructure in the Gulf at risk and energy arteries under threat, the world economy is walking a tightrope. The bond market's recent tremors serve as a reminder that even the safest assets are not immune when geopolitical and economic storms converge.