If oil prices don’t drop, the global economy can only move toward "slow growth + high inflation."

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Persistently high oil prices are pushing the global economy toward a worrying macro landscape: slowing growth and stubborn inflation coexisting. Morgan Stanley warns that the real risk is not the one-off abrupt shock of oil prices, but the deeper impact brought by high oil prices remaining elevated for an extended period and failing to return to lower levels.

According to Wind Trading Desk, a research team led by Morgan Stanley's Chief Global Economist Seth B Carpenter pointed out in the latest report that even if the geopolitical tensions around the Strait of Hormuz do not further escalate, they could still maintain partial restrictions on crude supply for quite some time, causing oil prices to carry a persistent geopolitical premium.

In this scenario, what the global economy faces is not a short-lived price shock, but a lasting elevation in energy costs—whose macro impact will be far more complex than any historical oil price shock, with obvious stagflation characteristics.

The direction of this round of shock is stagflationary; monetary and fiscal policies will diverge significantly as a result, and produce completely different effects on different economies. For investors, this means rate cut expectations need to be repriced, while national policy paths will become a key variable in asset allocation.

Inflation Risks Underestimated: Secondary Effects More Persistent Than History

Morgan Stanley points out that the fundamental difference between this round of oil price shock and past ones lies in the "duration" of prices, not the "peak." In previous oil price shocks, prices often retreated quickly after rising, naturally compressing the transmission period of inflation.

However, if oil prices stay high for a long time without mean reversion, companies will face a prolonged cost shock, and their ability to absorb costs by squeezing profit margins will gradually be exhausted, eventually forcing them to pass the pressure on to the price end.

This means that even as the year-on-year rise in energy prices mathematically narrows over time, the secondary effects—that is, the transmission of energy costs to broader goods and services prices—will be more stubborn than historical experience suggests. Thus, even if overall headline inflation data seems to improve, inflation risks remain skewed to the upside.

Meanwhile, growth will slow but not collapse. Persistently high energy costs are equivalent to an implicit tax on consumption and corporate profit margins, which will drag down economic activity in both developed and emerging markets. This drag effect needs time to fully appear, but its impact should not be underestimated. Such a scenario could lead to global recession, and the anti-inflationary shock from slowing growth will not be sufficient to offset the push from secondary effects—hence the formation of a stagflation landscape.

Central Bank Policy Divergence: Fed Holds, ECB Leans Toward Rate Hike

Facing stagflation pressures, major central banks have shown clear policy divergence, which will be a core variable affecting global interest rate markets.

Central banks more sensitive to inflation expectations—especially the European Central Bank and the Bank of England—tend to further tighten policy in the current environment. According to their latest forecasts, the ECB's next step will be a 25-basis-point rate hike, expected in June 2026; the Bank of Japan is also expected to raise rates by 25 basis points in June 2026.

By contrast, the Fed faces a more complicated situation. The Fed will choose to pause rather than cut rates, and this pause could last quite some time. Its baseline forecast shows the Fed's next 25-basis-point rate cut window is September 2026, provided inflation expectations do not drift significantly. If upward signals in inflation expectations appear, the Fed may even keep its restrictive policy stance until 2027.

The response of emerging market central banks is more scattered, highly dependent on each country's fiscal situation and external vulnerabilities, making it hard to form a unified policy direction.

Fiscal Policy: Energy Subsidies as a Double-Edged Sword Deepen Global Divergence

On the fiscal policy front, governments' responses will profoundly impact inflation trends and further deepen the divergence of global macro frameworks.

Many governments are inclined toward broad price-suppression actions, including cutting fuel taxes, setting price caps or implementing universal subsidies, shifting the cost burden from residents to public or quasi-public balance sheets. While such measures can provide short-term cushioning, they distort price signals, support demand, and may keep inflation elevated over the long term—especially when these measures are constrained by limited fiscal space and hard to sustain.

For energy-importing emerging markets with limited fiscal space, broad subsidies could harm external account balances and policy credibility; energy exporters, by contrast, benefit from improved terms of trade and some countries can gain extra fiscal revenue. This divergence is the fundamental reason why emerging market central bank policy is highly fragmented and difficult to coordinate.

By comparison, countries that take more targeted support measures—focusing on vulnerable households or specific industries, while allowing energy prices to flow through more fully—see greater short-term pressure on consumers, but lower fiscal costs and more controllable inflation shocks, at the cost of greater downside risk to growth. Given current high debt levels, rising financing costs, and fiscal rule tightening, unless recession risks rise significantly, the likelihood of large-scale fiscal intervention is limited.

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