“Following the agreement on the memorandum of understanding between the United States and Iran, oil prices have decreased, but the new attacks make the situation extremely unstable.” This is stated in the ECB economic bulletin, which highlights how after the signing of the memorandum of understanding between the United States and Iran, under which both parties committed to restoring free passage through the Strait of Hormuz, the price of Brent crude initially recorded a sharp drop. “More recently, however, following new military attacks and after President Trump declared the end of the ceasefire, it has risen again, settling at a level overall 1 percent lower than that recorded on June 11, the start of the period under review.”
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Downside risks for growth and upside risks for inflation
The growth prospects for the euro area are subject to downside risks, while those for inflation are tilted to the upside. This is indicated by the ECB in the Economic Bulletin, which emphasizes that despite the memorandum of understanding reached in June between the United States and Iran, the geopolitical situation remains fragile. New disruptions in energy supplies could keep energy prices high, weighing on real incomes, consumption, and investment. A deterioration in market confidence, tightening credit, and increased trade frictions could also weaken demand, exports, and supply chains.
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Russia’s war against Ukraine remains another significant source of uncertainty. On the price front, an intensification of the energy shock could produce indirect and second-round effects on inflation and wages stronger than expected. The fragmentation of global supply chains, shortages of critical raw materials, and extreme weather events could further fuel pressures.
A lasting solution to the conflict in the Middle East would instead reduce risks for both growth and inflation. Activity could also benefit from defense and infrastructure spending, reforms, and the adoption of new technologies.
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Eurozone outlook strongly uncertain due to geopolitics and energy volatility
