The Iran conflict clearly continues to dominate the near-term outlook, but although physical energy supply disruptions are bigger than ever, energy prices have fallen back, with the mood music in markets shifting once the United States and Iran agreed on an extended ceasefire, said ABN Amro.
As the bank wrote when the ceasefire was first announced, developments so far remain in line with its base case, which does not take a view on the conflict itself but rather the extent and timing of the end of severe energy supply disruptions to end-May.
Given this, ABN Amro refrains from making further material changes to its base case for growth, inflation and central banks this month, but the bank do make some incremental adjustments that take account of fiscal policy measures and evolving central bank reaction functions.
Most notably, it has become clear that the European Central Bank will not be ready to hike at next week's Governing Council meeting, though ABN Amro thinks it will be ready to do so at the June meeting.
Although the United States has extended unilaterally the ceasefire indefinitely, negotiations on Iran's nuclear enrichment look to have stalled. Both the United States and Iran are now essentially in a standoff over the Strait of Hormuz, using access to the chokepoint as leverage in their nuclear negotiations.
According to ABN Amro, put another way, the war seems to have morphed from a hot war to an economic one. On the positive side, it has become clear that neither side wants to restart military action.
In light of the continued uncertainty and the likely fragility of any peace deal that may or may not materialize over the coming days, the bank also updates its thinking on alternative scenarios to its base case, including touching on what a realistic worst-case scenario could look like.
Noteworthy is that a more positive scenario would still see inflation staying above target for some time yet, while even in the most negative scenario, ABN Amro still would not expect the inflation impact in Europe to be anywhere near as large as in the 2022-23 energy crisis which resulted from the Russian invasion of Ukraine.
Significant demand destruction in emerging markets in response to high energy prices is likely to happen long before recessionary forces would take hold in advanced economies. As such, the bank continues to see a recession only in the most negative scenario, and even then, confined to Europe rather than the United States.