The relief is real. Oil fell more than 16 percent in a single trading session after the ceasefire was announced. Global stocks rallied from Tokyo to Frankfurt to New York. The worst immediate fears — of oil reaching $200 a barrel, of economies tipping into deep recession, of a 1970s-style decade of stagflation — receded, at least for now.
But economists are almost unanimous in their assessment: the ceasefire is a pause, not a resolution, and the economic damage from 40 days of war cannot be reversed in two weeks — or even two months.
The Numbers That Matter
Traders do not see oil prices falling back to pre-war levels this year, according to forward-looking oil futures contracts, suggesting higher energy prices for months to come. The broad rally in asset prices and lower oil prices “reflects a reduction in tail risks, not a material improvement in the underlying outlook,” strategists at TD Bank wrote in a new note following the ceasefire announcement.
The OECD forecasts that due to the war, inflation in the US will reach 4.2 percent this year — higher by 1.2 percentage points than previous predictions. Similar forecasts were issued by the US Federal Reserve. UK inflation is expected to breach 5 percent in 2026, the highest prediction for Europe. In March alone, the EU’s inflation rate reached 2.5 percent as energy prices increased by 4.9 percent.
The economic impact on Europe has been characterized by a severe energy-supply shock. The European Central Bank postponed its planned interest rate reductions on March 19, raising its 2026 inflation forecast and cutting GDP growth projections, with economists warning that energy-intensive economies including Germany and Italy face high risks of technical recession by the end of 2026.
Why Recovery Will Take Time
The backlog of stranded ships could take weeks to clear even under ideal circumstances. Infrastructure damage from attacks in recent weeks has resulted in energy shortages across the globe and could take years to repair. It will take time to restart production at facilities that curtailed output.
There are also real prospects that Iran will now effectively tax shipments through the strait indefinitely, creating a new constraint on global supply of oil and other commodities that did not exist before the war. Maersk, one of the world’s biggest container shipping companies, said: “The ceasefire may create transit opportunities, but it does not yet provide full maritime certainty, and we need to understand all potential conditions attached.”
Economist Justin Wolfers of the University of Michigan argued that even a quick Iran deal would likely fail to reverse some of the economic damage already wrought by the war: “The economy doesn’t just snap back.” He cited stock market losses, ongoing pressure on energy prices, and fresh military expenditures as factors that would continue to weigh on growth.
The Federal Reserve’s Dilemma
The ceasefire puts the Federal Reserve in a position that has no clean solution. Before the war began, inflation had already stalled above the Fed’s 2 percent target. The war made it significantly worse — and the ceasefire has only partially reversed that damage.
Federal Reserve Vice Chair Philip Jefferson warned — in a speech delivered before the ceasefire was announced — that the war and prolonged energy price rises could weigh on consumer and business spending, adding “considerable uncertainty to the global economic outlook.” Jefferson said the jump in energy prices “will apply some upward pressure on headline inflation, at least in the near term” and cited geopolitical tensions as upside risks to his inflation forecast.
Interest rate reductions that were expected before the war were postponed or reversed in light of higher inflation caused by supply shortages. Central banks worldwide now face a challenging environment: raising interest rates to subdue inflation risks tipping growth into contraction, while easing too soon could exacerbate price pressures.
The Stagflation Risk
The word that economists keep returning to is “stagflation” — the combination of high inflation and stagnant or negative growth that characterized the 1970s energy crises and proved resistant to conventional monetary policy tools.
Economists at Deutsche Bank and Oxford Economics have both flagged rising stagflation risk. Oil price shocks have historically preceded stagflation: economists pointed to the crises of 1973, 1978, and 2008 as evidence that every significant spike in oil prices has been followed in some form by a global recession.
Oxford Economics modelled a scenario in which Brent crude averages $140 per barrel for eight weeks, finding that global inflation would hit 7.7 percent — close to the 2022 peak — and that unlike 2022, when the global economy kept growing through the price shock, this disruption would tip the world into outright contraction.
Under this scenario, world GDP falls in the middle of the year, the calendar year growth rate for 2026 slows to 1.4 percent, and the US and most major advanced economies slide into recession; China’s growth falls to 3.4 percent.
While that worst-case scenario is now less likely given the ceasefire, the structural damage from six weeks of disruption remains.
The Countries That Will Feel It Longest
The Gulf states have suffered most acutely — GDP is projected down over 8 percent in 2026 before a rebound as production recovers. Advanced Asian economies, which are especially reliant on Gulf oil, have taken a heavy blow from energy import cost surges and supply chain disruption. Europe faces a painful squeeze on gas and electricity.
Turkey’s finance minister summarized the global outlook bluntly: “The global economy is currently experiencing the strongest shock since World War II. The decision by the United States and Iran on a temporary ceasefire is welcome, but even if it holds in its current form, restoring supply chains to pre-war levels will take months even under the most optimistic scenarios.
If this shock persists and the ceasefire is broken, prices for oil, natural gas, and commodities will rise again. This, in turn, will lead to slower economic growth, higher inflation, and the risk of a global recession.”
What Would Actually Help
The IMF projected around 3.3 percent global growth for 2026 — a figure that, while positive, sits below pre-pandemic trends and leaves limited buffer against further shocks. The IMF explicitly flagged trade policy uncertainty, geopolitical setbacks, and elevated debt levels as risks that could derail even this moderate growth path.
A permanent peace agreement from the Islamabad talks, combined with a full and sustained reopening of the Strait of Hormuz, would provide the clearest path toward economic recovery. But even in that best-case scenario, the structural damage — to infrastructure, to supply chains, to insurance markets, to business confidence — will take months to unwind.
“Damage to infrastructure, higher shipping and insurance costs, and structural shifts in energy pricing mean the shock will likely have a long tail, feeding through to inflation, growth, and corporate earnings over the coming months,” one economist wrote in a note. “While the ceasefire has improved the near-term outlook, the broader macro implications of the crisis are still unfolding.”
The market celebrated a ceasefire. The economy is still recovering from a war.
