“Global Stagflation Looms” Middle East-Driven Energy Shock Intensifies Low-Growth, High-Inflation Pressures as Governments Scramble for Countermeasures

Major economies including the United States, the United Kingdom, and the European Union face mounting growth headwinds from the Iran war
Southeast Asian nations expand biofuel utilization, putting food supply chains under severe strain
IMF projects slower global growth while inflation accelerates sharply

Signs of a worldwide stagflationary cycle — rising inflation amid economic stagnation — are becoming increasingly apparent. An energy shock triggered by the Middle East conflict is fueling higher prices and falling wages, rapidly slowing economic growth across numerous countries. Governments worldwide are rolling out emergency measures to secure energy supplies and shield their economies, but easing the dual pressures of weak growth and elevated inflation in the near term appears virtually impossible.

Stagflation Warning Signals Flash Across Major Economies

According to a Financial Times report on May 26, inflation in major economies has recently begun outpacing wage growth due to the Iran war. U.S. consumer prices surged 3.8% year-over-year last month, while average hourly earnings rose only 3.6% over the same period. As persistently elevated oil prices continue amid the Middle East conflict, the real purchasing power of U.S. households — which had gradually recovered after the COVID-19 pandemic — has once again entered contraction territory. Should crude prices remain elevated over the long term, disposable income for American households is projected to decline by more than $150 per month on average.

The United Kingdom faces a similar predicament. Britain’s real average wages excluding bonuses rose only 0.1% year-over-year during the January-to-March period and are expected to turn negative if inflation accelerates further. The British government has introduced a series of stabilization measures, including temporary value-added tax cuts during the summer holiday season and delayed fuel tax hikes. However, James Smith, senior economist at the Resolution Foundation, stated that such measures would be insufficient to prevent “the fourth entrenched decline in real wages since the 2008 financial crisis.” As wages shrink and household disposable income declines, economic growth naturally faces increasing downward pressure.

Economic distress is also becoming increasingly evident within the European Union. Following the outbreak of the Ukraine war, the EU sharply reduced its dependence on Russian energy and expanded imports of Middle Eastern liquefied natural gas. The Iran conflict therefore represents a major destabilizing factor for the bloc’s energy supply chain and broader economy. In its “Spring 2026 Economic Forecast” released on May 21, the European Commission projected EU real GDP growth of only 1.1% this year, down 0.3 percentage points from last autumn’s forecast. Consumer inflation was projected at 3.1%, 1 percentage point higher than previous estimates.

Southeast Asia Diverts Food Crops Into Fuel

Asia is similarly descending into turmoil. Southeast Asian nations in particular have begun aggressively diverting key agricultural commodities such as palm oil, coconuts, and sugarcane into biofuel production as part of their crisis response. Governments are mandating higher blending ratios of vegetable-based biofuels in diesel and gasoline.

Thailand’s Commerce Ministry, for example, is raising the standard palm oil blending requirement for diesel to B7, containing 7% biodiesel, while expanding supplies of B20 fuel for heavy vehicles. Malaysia is likewise set to raise its national diesel standard to B15 beginning in June. Indonesian authorities, meanwhile, abruptly instructed refiners to increase the palm oil blending ratio in diesel from 40% to 50% by July 1.

Analysts warn that such aggressive fuel conversion policies could inflict severe damage on exports and domestic livelihoods. Fabby Tumiwa, executive director of the Institute for Essential Services Reform (IESR), an Indonesian think tank, stated that Indonesia’s mandatory B50 policy would divert between 4 million and 5 million tons of crude palm oil annually — as much as 15.5% of total exports — into fuel tanks rather than overseas markets. Critics argue the policy could cost the Indonesian government up to $770 million annually in lost export tax revenue. The Philippines also faces the threat of a coconut supply chain collapse after attempting to raise biodiesel blending standards, while Vietnam and Thailand are grappling with the unintended consequences of diverting food crops into fuel production.

Some countries are also tightening resource controls. Indonesian President Prabowo Subianto declared during an annual parliamentary address on May 20 that strategic commodities such as palm oil and coal would only be exported through state-designated enterprises. Prices for these commodities have surged following the Iran conflict, making them critical sources of Indonesia’s trade revenue.

President Prabowo stated that “underreporting of prices and accounting manipulation” during the export process were generating losses worth hundreds of billions of dollars. He publicly criticized practices including under-invoicing through shell subsidiaries, transfer pricing manipulation among affiliates, and the concealment of export proceeds in offshore secret accounts. “This policy will maximize state revenue,” he emphasized. “I do not want to see weak leadership that allows national income to decline simply because it lacks the courage to firmly control resources.”

IMF Issues Bleak Economic Outlook

Numerous countries are scrambling to respond to the energy shock. The International Energy Agency estimates that the number of nations implementing emergency measures to combat the energy crisis has risen from 55 at the end of March to 76 recently. Australia announced plans to increase government spending on fuel and fertilizer stockpiles to as much as $6.5 billion. India has urged citizens to curb gold purchases and overseas travel while moving to bolster foreign exchange reserves. France unveiled approximately $76 million in temporary targeted support measures for the transportation, fishing, and agricultural sectors.

Against this backdrop of mounting disruption, the outlook for the global economy continues to deteriorate. On May 14, the International Monetary Fund projected global economic growth of 3.1% this year, warning that sustained crude prices above $100 per barrel could push growth down into the 2% range. The IMF raised its global inflation forecast to 4.4%, up 0.6 percentage points from its January estimate. “The global economy is being affected through channels including rising energy prices, elevated inflation expectations, and growing risk aversion in financial markets,” the IMF stated.

Country-level projections further underscore the deteriorating environment. The IMF lowered the U.S. growth outlook by 0.1 percentage points from January to 2.3%. Eurozone growth forecasts were reduced by 0.2 percentage points, while the United Kingdom saw a 0.5 percentage point downgrade. Saudi Arabia’s growth forecast was slashed by a substantial 1.4 percentage points due to worsening production disruptions and export declines caused by the closure of the Strait of Hormuz and attacks on Iranian energy facilities. China’s growth forecast was trimmed from 4.5% to 4.4%, while South Korea and Japan maintained their January projections at 1.9% and 0.7%, respectively. Aggressive fiscal stimulus measures helped offset the impact stemming from their heavy dependence on imported crude oil.