Middle East tensions threaten developed economies

March 18, 2026 (MLN): A sustained conflict in the Middle East may pose new credit and fiscal challenges for developed market (DM) sovereigns in Europe and Asia, according to Fitch Ratings.

The highlighted that higher energy prices, rising borrowing costs, and slower economic growth could strain government budgets, while inflationary pressures may weigh on households and businesses.

Fitch warned that fiscal support measures designed to cushion the impact of energy shocks such as tax rebates, oil price caps, or direct household aid could further widen budget deficits and raise government debt levels.

Sovereigns with elevated debt, structural deficits, or weaker inflation-growth trade-offs are particularly vulnerable to prolonged shocks.

Higher-than-expected oil and gas prices would be the primary channel of risk, potentially eroding real incomes and domestic demand.

Fitch’s baseline assumes Brent crude prices remain near current levels through March 2026, before averaging around $70 per barrel.

However, a scenario in which oil prices hover between $95–100 per barrel throughout 2026 could slow economic growth across major DMs, pushing some nations close to recession, according to a simulation using the Oxford Economics Global Economic Model.

Among large developed economies, Italy, the UK, Japan, and France face the highest inflation risks due to their energy supply structures, while Korea, Japan, the UK, and Italy would experience the strongest growth slowdown as higher energy costs cut into household consumption.

Smaller DMs would see varied impacts, with central and eastern European countries, including the Baltic states and Slovenia, and Taiwan most affected. Norway is largely insulated, benefiting from its status as an energy exporter.

Fitch noted that developed economies are less vulnerable to external financing or foreign-currency debt pressures compared to emerging markets.

Instead, energy import dependency, gas-linked pricing mechanisms, and energy consumption patterns will play a key role in shaping the economic impact.

Fiscal responses to rising energy costs could include targeted subsidies, support for energy-intensive sectors, or broader EU-level coordination.

While these interventions carry material costs, Fitch expects fiscal measures to be more narrowly targeted than during the 2022–2023 energy price spike due to weaker fiscal starting positions.

Eurozone government bond yields have already risen by an average of 29 basis points since late February.

Sustained higher borrowing costs could further pressure budgets through higher interest expenses on maturing debt, though Fitch does not anticipate near-term “fiscal cliffs.”

However, prolonged energy price shocks could limit policy flexibility if economic growth slows.

Monetary policy will need to balance inflationary pressures against weaker activity.

In the event of sustained high oil prices, central banks may face constraints in raising rates, as efforts to curb energy-driven inflation could clash with slower demand and employment growth.

Fitch’s analysis emphasizes that developed market economies face a complex interplay of energy, fiscal, and monetary challenges amid global geopolitical tensions, with varying exposure depending on energy dependence, fiscal health, and policy responsiveness.

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