In the longer run, the Iran-Israel crisis may raise the risk of nuclear proliferation in the Middle East and beyond. The crisis may furthermore accelerate increases in regional military expenditure just as NATO members themselves have agreed to increase defence spending to 5% of GDP – more than double a former target of 2%.
Such heightened geo-political risk is a core downside risk highlighted by Scope Ratings (Scope)’s latest global macro and credit outlook, not least for Europe. Growth in the region remains more moderate than that of the United States and China while increasing defence budgets risk creating extra fiscal strain for sovereigns already struggling to cut budget deficits and reverse increasing public debt.
Germany’s stagnant performance this year should drag euro-area growth to a less-than-expected 1.1%, 0.5pps below Scope Ratings’ October-2024 forecasts, before a slight rebound in 2026 to 1.5%. By contrast, US growth remains comparatively resilient even though Scope has nevertheless lowered its projections to 1.8% for 2025 from a previous projection of 2.7%. China’s economic growth is forecast at a better-than-anticipated 4.8% this year, supported by the ambitious government target for this year of “around 5%” economic growth and the recent temporary easing of US-China trade tensions.
Energy Prices to Stay Volatile; Crisis Presents a Risk to Inflation Outlooks
Inflation remains another potential source of economic weakness, including for Europe, given Scope Ratings’ consistent view that borrowing rates are likely to stay relatively higher for longer, given the higher structural price pressures than before the pandemic.
Here, Europe’s dependence on energy imports continues to be a vulnerability, not least if oil prices stay volatile amid the heightened and unresolved tensions within the Middle East region. This means continued risks for inflation and external-sector balances globally – especially for significant energy importers, which, inside the EU, include economies such as Malta, Cyprus, Luxembourg, Belgium and Greece.
As things stand, Brent futures (for August delivery) have dropped to under USD 70 a barrel at the time of writing, from the highs last week at nearly USD 79 a barrel. Oil is today below the levels when Israel began the attacks recently on 13 June. But the uncertainties within the region ensure the volatility in crude prices stays elevated.