The confrontation between the United States and Iran continues to capture market attention. A fragile truce is underway, while the final outcome remains uncertain and negotiations are expected to be complex. In this context, everyone is trying to assess the extent of the damage to the global economy and the speed of any potential recovery. This is a fundamental exercise, but it is equally crucial to understand how the crisis in the Middle East intersects with two long-term structural transformations of the global economy: deglobalization and innovation, with their impact on productivity.
At the spring meetings in April in Washington, the International Monetary Fund (IMF) outlined a particularly pessimistic scenario, articulated in three possible outcomes for the global economy: negative, worse, and terrible. Even in the case of a rapid conclusion to the conflict, according to the IMF a significant portion of the damage would now be irreversible. An extension of hostilities into 2027 could even trigger a global recession.
Financial markets, however, seem to offer a less alarmist reading: U.S. equity indices are trading at or just below record highs, while credit spreads remain extremely contained.
Balanced or one-sided risks?
The IMF emphasizes mainly downside risks. Investors, on the other hand, continue to perceive a more balanced scenario, with risks distributed on both fronts. Is this a sign of overconfidence? If the truce holds and trade flows through the Strait of Hormuz gradually return to normal, the economic impact could remain limited. The IMF’s Managing Director, Kristalina Georgieva, has acknowledged that today the global economy is less dependent on energy than in the 1980s. Furthermore, the institution’s analyses of oil shocks show that the most recent ones have had less impact on growth than those in the 1970s, thanks to stronger monetary policies and lower energy intensity. The United States, in particular, is more protected due to its energy independence.
The big picture
However, there is one element that, in my opinion, both international institutions and markets are underestimating. The current energy shock overlaps with two structural trends destined to redefine the global context: the retreat of globalization and the innovation cycle that supports productivity growth.
The two phenomena present a crucial difference. The slowdown of globalization is, by nature, a global phenomenon: it involves almost all countries, while trade rules fragment and supply chains reorient along geopolitical lines. The productivity boom, at least for now and within advanced economies, remains predominantly a U.S. phenomenon. This asymmetry has significant implications for financial markets.
I believe that both trends will exert pressure in the same direction on yields. Deglobalization reduces the efficiency of international trade, increasing costs and generating a structural upward push on inflation in most countries. Higher inflation translates into higher nominal yields and, where investors require compensation for inflation uncertainty, also into higher real yields.
At the same time, stronger productivity growth implies an increase in the neutral real rate. When productivity accelerates, the real return on investments rises and real equilibrium rates must adjust accordingly. This has a direct impact both on the Federal Reserve’s neutral policy rate and on the real yields of bonds.
U.S. productivity: a phenomenon already underway
The acceleration of productivity in the United States is not a forecast, but a fact. Since mid-2023, the average annual growth has been around 3%, about double the previous decade. This result reflects the diffusion in the economy of innovations developed over the last 10–15 years. It does not yet fully incorporate the most recent effects of generative artificial intelligence, but already includes efficiency gains related to machine learning. The impact of large language models, which have become the symbol of AI, is yet to emerge significantly.
The time lag between innovation and productivity is a recurring phenomenon. Companies must first recognize the value of a new technology, then invest to integrate it into production processes, reorganize activities, retrain the workforce, and redefine incentive systems. Not by chance, in 1987 Nobel laureate Robert Solow observed that “the computer age is everywhere except in the productivity statistics.” Only in the mid-1990s did productivity begin to take off. Today we are in the midst of a phase of investment and innovation that is expanding the frontier of GenAI applications; the most substantial benefits may still lie ahead and prove profoundly transformative.
An unevenly distributed future
If GenAI fulfills even part of its promises, the productivity growth cycle could extend over time. But patience will be needed. The more disruptive these technologies prove to be, the greater the organizational effort required to adopt them and the longer the delay before their impact emerges in the data.
The question of the global diffusion of benefits remains open. The prevailing assumption is that they will extend worldwide, but access to technology does not coincide with the ability to use it effectively. The real constraint is organizational flexibility. The 1990s offer an illuminating precedent: between 1996 and 2005 productivity growth in the United States doubled, while in the United Kingdom it remained essentially stable and in France and Germany it was slightly lower. Italy, even then, was entering a long phase of stagnation. Academic studies showed that in Europe subsidiaries of U.S. groups recorded significantly higher productivity gains than local companies, precisely thanks to greater organizational flexibility. The AI revolution will also bring widespread benefits, but not uniformly.
What the war ends up strengthening
The conflict with Iran risks amplifying these structural trends. Interruptions in energy supplies strongly highlight the fragility of global chains and reinforce the push toward deglobalization, or more precisely toward regionalization of production. Governments that were already considering reshoring policies, stockpiling, and investments in energy security now have an additional incentive to accelerate. In the short term, the energy shock will likely cause an increase in headline inflation, with the risk of second-round effects if the truce weakens.
Implications for investors
All this reinforces my long-term conviction: risks to longer-term yields remain tilted upward globally. Deglobalization fuels structurally higher inflation; the productivity boom, concentrated in the United States, pushes the neutral real rate upward. The war with Iran amplifies both channels through a short-term inflation shock and a further questioning of the globalization model.
Added to this is a factor I have already highlighted in the past: the high level of public debt and particularly large budget deficits in advanced economies. Here too, the conflict acts as an accelerator. Along with the war between Russia and Ukraine, it has brought back to the forefront the need for higher defense spending and additional investments in energy security.
We are likely to face a phase of marked volatility, requiring investors to be flexible and adaptable. The uneven impact of the energy shock may create selective opportunities for those focusing on the fundamentals of countries and sectors. But the main message remains clear: in the coming years, the underlying bias for inflation and bond yields is upward. From a portfolio perspective, we continue to favor shorter-duration assets, maintaining a cautious approach to credit while seizing targeted opportunities in various segments, which still offer attractive overall yields. We will also continue to seek opportunities to enter and strengthen exposure to emerging markets.
