If the ceasefire were to falter, in our adverse scenario — “escalation to achieve de-escalation” — the US administration would increase pressure on the Iranian regime through various measures, such as possible attacks on power plants. The operational range in this scenario is broad, and the real constraint is risk tolerance. This heightens the tail risk towards a potential scenario characterized by a prolonged cycle of intensification. In this context, central banks would be pushed to growth-penalizing rate hikes amid unanchored inflation expectations, while economic growth stagnates or contracts across different economies and the market environment unmistakably shifts to “risk-off.”
LESS ADVERSE SCENARIO: FROZEN CONFLICT AND PARTIAL STABILIZATION
In our less adverse scenario, both parties maintain a fragile “facade” ceasefire that largely holds. The most contentious issues — Iran’s nuclear program, missile arsenal, network of allies, as well as operational control of the Strait of Hormuz — are postponed. Both sides claim victory and the open conflict turns into a frozen conflict. In this scenario, the Strait is largely reopened and the United States establishes a permanent presence in the Gulf sufficient to guarantee the underwriting of insurance policies.
Oil prices partially retreat and rate hikes in oil-consuming countries are generally ruled out. Fiscal stimulus supports growth, particularly in the United States, while simultaneously fueling upward inflationary pressures. Yield curves remain steeper due to overheating risks, which represents our modal scenario for the US economy, as explained below. Risk assets initially register a relief rally before moving sideways.
NO POSITIVE SCENARIOS
The descriptions of our war-related scenarios — the adverse and the less adverse — indicate that there are no longer any “positive” options and that the scars of the conflict will remain for years.
MOST LIKELY SCENARIO: LESS ADVERSE OUTCOME
We still consider the “less adverse” outcome more likely, given the areas of converging interest between the United States and Iran, based on existential political needs and the Iranian belief that credible deterrence has been reestablished.
US BASELINE SCENARIO: ECONOMIC OVERHEATING
All this feeds into our baseline “overheating” scenario (40% probability) for the US economy over the next 12 months. This scenario assumes that real GDP growth accelerates significantly above trend, driven by AI-related investments, a strong upper-income consumer segment, and, above all, a double stimulus. It also assumes that the weakening labor market and the prospect of a productivity boom give the Fed room to reduce policy rates to 3.00-3.25%. At the same time, we expect fiscal policy to remain expansionary over the forecast horizon.
We believe the Iranian shock will keep crude oil and related energy prices elevated for several months, before partial normalization in the second half of the year in line with the Brent futures curve.
INFLATION AND MARKETS IN THE UNITED STATES
In our view, the energy shock dents but does not compromise the robust nominal growth supporting our baseline scenario. Inflation is expected to rise to 3.5% in Q2 before gradually falling toward 3.0% in Q1 2027, while growth will slow in Q2 before reaccelerating by year-end, potentially supported by further fiscal measures related to defense and energy subsidies.
In this context, we believe risk assets remain resilient, supported by nominal GDP, but may be restrained by the risk of unanchoring inflation expectations.
EUROPE BASELINE SCENARIO: WEAK BUT RESILIENT GROWTH
Our baseline scenario for Europe remains one of contained but resilient growth, with a 40% probability, and an expected growth rate around 1.2% per year. We anticipate growth will reach a low point thanks to fiscal support measures already enacted in Germany, Italy, and France.
Inflation is expected to peak around 3.5% by mid-2026, then fall to 3% by year-end and subsequently to 2%, as the impact of energy price hikes is excluded from year-on-year calculations. Consequently, the ECB will raise rates in June and again in September, bringing the deposit rate to 2.5%.
CHINA BASELINE SCENARIO: MODERATE GROWTH (“MUDDLE THROUGH”)
Our baseline scenario for China is also “muddle through,” moderate but sustained growth, with a 60% probability. In this scenario, China pursues a mix of AI-driven industrial policies with substantial interventions to support domestic demand.
Excess capacity gradually declines but continues to exert deflationary pressure globally.
Fiscal policy remains accommodative, with calibrated support for consumption, real estate, and infrastructure.
