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[Matlab](http://matlab.com) by The MathWorks lets you access, visualize, and analyze historic time-series data to identify patterns or uncover complex relationships. From within a single environment you can:

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[SASEHAVR](http://support.sas.com/documentation/cdl/en/etsug/67525/HTML/default/viewer.htm#etsug_sasehavr_gettingstarted01.htm) is a seamless interface between Haver and SAS data processing that enables SAS users to read economic and financial time series data that reside in a Haver Analytics DLX (Data Link Express) database. [SASEHAVR](http://support.sas.com/documentation/cdl/en/etsug/67525/HTML/default/viewer.htm#etsug_sasehavr_gettingstarted01.htm) requires both SAS/ETS and Base SAS Software.

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[RATS (Regression Analysis of Time Series) Econometric Software](https://estima.com) by Estima is a leading econometrics and time-series analysis software package. It provides ability to do linear and non-linear least squares, forecasting, SUR and ARIMA models and in addition, supports advanced techniques such as GMM, ARCH and GARCH models, state space models, and more.

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Abdel M. Zellou, Ph.D.

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With the Iran conflict, geopolitical risk has soared to alarming levels

Robert Brusca

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**The German industrial sector falters**
German industrial output in January fell for the second month in a row; it has a sequential pattern of growth rates becoming progressively weaker from 12-months to six-months to three-months. This is not a good pattern or development. Orders also fell sharply in January, dropping by 11.1% month-to-month. At least the orders progression is not as clearly negative as it is for industrial output, but over three months real manufacturing orders are declining at a 1.8% annual rate even though the 12-month and six-month growth rates of orders still show solid positive growth results.

These data are up-to-date through January, so they do not contain any effects of the new conflict in the Middle East.

**Sequential output trends**
German industrial output trends show progressively weaker numbers from 12-months to six-months to three-months. Consumer goods output and intermediate goods output show progressively weaker sequential results. Capital goods output shows a skinny rise of 0.1% over 12 months, a 6.6% decline at an annual rate over six months, and then a lesser pace of decline of 2.8% over three months. Capital goods output is not getting progressively weaker; however, it has been weakening and the trend is disappointing.

**German survey results are less dire**
Other indicators of German industrial activity generally show improved monthly results. All four of the metrics in the table show improved survey values in January compared to December, but December had showed weakness relative to November across the board for those 4 metrics. The message from progressive averages in the table, from these other indicators, is that not much has changed that would allow us to discriminate strongly among activity performances reported over 12 months, six months, or three months. In the end, the three-month values are generally slightly stronger than the 12-month values, but not in a way that looks significant, and even that result does not hold for the ZEW current index.

**Industrial production in other Europe**
Industrial production trends for other European reporters show declines in output in January of a fairly substantial magnitude in Spain and in Ireland, against strong increases in Portugal, Sweden, and Norway, and the more modest increase in France. IP in January shows cross-currents and a good deal of extremism in other Europe. The progressive trends for manufacturing production show Spanish and Irish trends deteriorating sharply from 12-months to six-months to three-months France and Portugal report uneven results that do not clarify what the underlying trend is doing. However, in northern Europe, Sweden and Norway are showing sharply accelerating growth from 12-months to six-months to three-months.

**Quarter-to-Date (as of January)**
In the quarter to date, German manufacturing output is falling overall and for all its major components. German real manufacturing orders are falling at a 30.3% annual rate in the quarter to date, which is a nascent statistic since only January data are available now. The other industrial indicators show positive trends for most measures, with the IFO manufacturing expectation being the exception, as it weakens. Industrial production for other Europe shows sharp quarter-to-date declines in Spain and Ireland, with extremely strong quarter-to-date results in Sweden and Norway; there is strong performance from Portugal and a solid increase from France.

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**Summing up**
On balance, the industrial production picture for Germany shows a decline, with a drop in orders raising more eyebrows about what the future may have to offer. The industrial surveys are a counterpoint, showing relatively more strength and stability than German IP trends. Meanwhile, the rest of Europe doesn't give us much to go on, because performance there clearly is bifurcated, with trends operating at cross-purposes. The long and the short of it, is that the long-awaited industrial revival in the wake of COVID and the Russian attack on Ukraine, is still not in gear - certainly not in Germany, and not in Europe.

Germany

German Output Trends in January Break Lower

Sandy Batten

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Nonfarm payroll employment (from the survey of establishments) unexpectedly fell by 92,000 in February with downward revisions to December and January, according to today’s report from the Bureau of Labor Statistics. The Action Economics Survey expected payrolls to increase by 63,000. The 130,000 monthly increase previously reported for January was revised down to 126,000 while the 48,000 gain previously reported for December was revised down to a 17,000 decline. Over the past three months, nonfarm payrolls have averaged a 6,000 monthly increase. Over the past six months, payrolls have averaged a 1,000 monthly decline. So, clearly labor market conditions have softened.

The meaningfully weaker payroll report was reinforced by a 203,000 increase in the number unemployed from the **household survey**, which led to a 0.1%-point increase in the unemployment rate. The labor force participation rate continued its downtrend by falling to 62.0% in February, the lowest reading December 2021, from 62.1% in January. Household employment fell by 185,000, its first monthly decline since July. Unseasonably cold weather did not appear to be a meaningful factor behind the drop in employment. The survey reported that 228,000 employed workers could not get to work because of the weather. This not seasonally adjusted figure was not unusually high for this time of the year and in fact was about half the size of the figures reported last January and February.

Today’s report contained the annual population adjustments for the household survey figures. These adjustments are usually released with the January figures that are released in February. However, the shutdown of the federal government in October and early November last year delayed that release. As widely expected, the population adjustment this year was extremely large and negative (-1.4 million for the labor force), reflecting the marked decrease in immigration that has occurred over the past year with the changes in immigration policy. Note that this adjustment is only made on 2026 household data. So, any comparison of current household data with that in previous years would be an apples-to-oranges comparison. However, Haver Analytics calculates population-adjusted household data for the major aggregates. They are in the USECON database.

Growth of average hourly earnings (AHE), a key variable for the Federal Reserve, picked up slightly in February. AHE increased 0.4% m/m, slightly above the expected 0.3% monthly gain. The y/y rate of advance edged up to 3.8% in February from 3.7% in January. Wage growth in private service-producing firms was unchanged at 3.7% y/y while goods-producing wage growth rose to 4.2% y/y, the highest rate since May, from 4.0% y/y in January. The current pace of total AHE growth is likely to be still a little too fast to be consistent with the Fed’s 2% inflation target, although continued solid productivity growth could restrain some of the inflationary impact of the current pace of wage growth.

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In the **establishment survey**, private-sector employment fell 86,000 in February, the weakest reading since December 2020. The Action Economics Forecast Survey looked for an 85,000 increase. Moreover, figures for both December and January were revised lower. The 172,000 increase previously reported for January was revised to 146,000 while the 64,000 rise previously reported for December was revised to a 7,000 decrease. Government employment fell 6,000, the fifth consecutive monthly decline.

Goods-producing employment declined 25,000 in February following a 51,000 jump in January. Construction employment slumped 11,000, likely adversely affected by the unseasonably cold weather, after a surprising 48,000 jump in January. Manufacturing jobs fell 12,000 in February following a 5,000 gain in January. Manufacturing employment fell in each month in 2025, not the result that the Trump Administration new tariff policy had intended. Private service-producing employment fell 61,000, its first monthly decline since last June. Healthcare and social assistance employment, which had previously been a major support for overall employment, fell 18,600 in February, its first monthly decline since January 2022. However, part of the February decrease reflected 31,000 striking nurses in California during the survey period. Monthly declines were widespread across the service-producing sector while any gain was extremely small. Leisure and hospitality employment fell 27,000 in February on top of a 12,000 decline in the previous month.

The length of the workweek was unchanged at 34.3 hours in February. Also, aggregate weekly hours were unchanged in February. The goods-producing workweek edged up to 40.1 hours, the highest since January 2023, while the private service-producing workweek was unchanged at 33.2 hours in February.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Nonfarm payrolls fell 92,000 in February with downward revisions to both December and January
- Private sector payrolls fell 86,000 in February.
- Average hourly earnings annual growth increased to 3.8% from 3.7% in both December and January.
- Unemployment in the household survey increased 203,000, pushing the unemployment rate up to 4.4% from 4.3% in January.
- The delayed population adjustment to the household data was a very large negative as had been expected given the observed declines in immigration.

U.S. Employment Unexpectedly Fell in February

Winnie Tapasanun

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Total retail sales fell an expected 0.2% in January after no change in December (unrevised) and a 0.5% rebound in November (+0.6% previously), data from the U.S. Census Bureau showed, pointing to a subdued start to Q1 2026. A 0.2% m/m January decline had been expected in the Action Economics Forecast Survey. The year-on-year growth rate picked up to 3.2% in January from 2.4% in December (the lowest since September 2024); this compared with 4.5% in January 2025 and remained far below a high of 17.1% in February 2022 and a record-high 51.8% in April 2021.

Excluding motor vehicles & parts, retail sales were virtually unchanged (+3.9% y/y) in January and December following six consecutive m/m gains. A 0.1% m/m January increase had been expected. Sales of motor vehicles & parts fell 0.9% (+0.1% y/y), down for the third time in four months, after a 0.2% December decline; this compared to an 8.9% drop (-3.8% y/y) in unit light vehicle sales after a 2.8% December increase.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rose 0.3% (4.9% y/y) in January, the third m/m rise in four months, after being unchanged in December. These sales are used in the construction of personal consumption expenditures in NIPA accounts. Nonauto sales excluding gasoline & building materials increased 0.2% (4.7% y/y), also up for the third time in four months, following December’s flat reading.

Sales by category showed mixed performance in January. To the downside, gasoline station sales dropped 2.9% (-3.7% y/y) in January after a 0.1% easing in December, marking the third m/m decline in four months and the largest since November 2023. Clothing & accessory store sales fell 1.7% (+3.0% y/y) after a 0.7% December decrease; sporting goods, hobby, book & music store sales slid 1.2% (+3.2% y/y) following a 0.5% December slide; and electronics & appliance store sales declined 0.6% (+2.0% y/y) after 0.1% December downtick—all three series posted m/m increases in November and October.

To the upside, miscellaneous store sales rose 2.0% (10.8% y/y) in January, the fourth m/m rise in five months, after no change in December. Nonstore retail sales advanced 1.9% (10.9% y/y), the strongest of four straight m/m gains, after a 0.2% December increase. Furniture & home furnishing store sales rebounded 0.7% (-3.5% y/y), the first m/m rise since October, after a 1.5% December decrease. Building materials & garden equipment store sales rose 0.6% (4.3% y/y), the third consecutive m/m gain, after a 1.2% December increase. General merchandise store sales were up 0.4% (1.5% y/y) in January after virtually unchanged in December and November; within this category, department store sales fell 6.0% (-8.3% y/y), the sharpest of three successive m/m falls, after a 3.9% December decline.

In the nondiscretionary sales categories, health & personal care store sales dropped 3.0% (+2.9% y/y) in January on top of a 0.3% decrease in December, registering the deepest of four straight m/m declines and the fifth in six months. Food & beverage store sales rose 0.2% (1.4% y/y) after a 0.3% December rebound.

Consumers appeared to dine out less frequently in January amid still-high inflation (January CPI +0.2% m/m, +2.4% y/y; core CPI +0.3% m/m, +2.5% y/y). Restaurant & drinking place sales fell 0.2% (+3.9% y/y) in January, the third m/m decline in four months, after falling at the same rate in December (-0.1% initially).

Retail Sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Total retail sales -0.2% (+3.2% y/y) in Jan.; 0.0% (+2.4% y/y) in Dec.
- Ex-auto sales flat for a second month (+3.9% y/y); auto sales -0.9% (+0.1% y/y), third m/m fall in four months.
- Declines m/m: gasoline stations (-2.9%), clothing stores (-1.7%), sporting goods (-1.2%), electronics stores (-0.6%).
- Gains m/m: misc. stores (+2.0%), nonstore sales (+1.9%), furniture stores (+0.7%), bldg. materials (+0.6%).

U.S. Retail Sales Decline in January After Flat December

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Industrial output in Norway rose by 1% in January after gaining 0.9% in December. Utilities output rose briskly, mining and quarrying output rose extremely sharply, while manufacturing output showed its second decline in a row.

The sequential growth rates show that the headline series for industrial production is decelerating, with nearly 7% growth over 12 months, nearly 5% growth over six months, and the growth over three months is down to zero.

On that same progression, utilities output has accelerated from 12 months to six months to three months, while mining and quarrying has a more complicated pattern—rising 1.5% over 12 month, falling at a 3.8% pace over six months, then rising at a 9.2% annual rate over three months.

In manufacturing, the trends are also complicated but with an upbeat ending. Manufacturing output is up by 2.2% over 12 months; the growth rate shows a decline, falling at a 0.4% annual rate over six months, with output then picking up and growing at a 5.9% annual rate over three months. Despite the setback in the middle, manufacturing has a positive year-over-year growth rate and shows strength over three months. This pattern is followed by food and also by textiles, with the exception that textiles are still showing a year-over-year decline of 0.9%. However, textile output is now growing briskly at a 7.4% annual rate over three months.

Norway is also experiencing a pickup in inflation. Its HICP inflation rate is 3.5% over 12 months, stays pretty much there with a 3.4% annual rate over six months, and then jumps up to a 4.9% annual rate over three months. However, that acceleration is tempered by a core inflation rate that is unchanged at 3.2% in each horizon. These growth rates are still excessive, with the central bank having a target of 2%; however, the inflation rate isn't getting any worse.

The industrial pattern for Norway is somewhat complicated by the fact that the headline measure for industrial production is showing a clear deceleration, while manufacturing is showing a more complicated pattern with some near-term acceleration over three months.

And for the quarter to date, which is a nascent comparison since the data are only available through January, we have overall industrial production growing at a 2.7% annual rate and manufacturing growing at a 2.2% annual rate. The quarter also shows inflation flying at a 3.9% annual rate, although core inflation is more tempered at a 2.6% annual rate pace.

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**Policy Choices**
Norway's policy choices are a little bit complicated, with inflation being undesirable, manufacturing showing growth pushing ahead but perhaps not in a strong enough fashion to be dependable, while overall industrial output is showing a tendency to slip. With global economic conditions being touch and go given the new developments in the Middle East and a likely push-up in inflation from oil prices, it will be important to watch the central bank and see what choices it makes—and whether it thinks it can look through the oil price increase that we're going to experience or whether it's time to put the hammer down on inflation.

Norway

Norway: Output Advances in January

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Nonfarm business productivity (output per hour) continued its robust rise in Q4, increasing 2.8% q/q SAAR following an upwardly revised 5.2% quarterly jump in Q3 (previously 4.9%). A quarterly gain of 1.9% was expected by the Action Economics Forecast Survey. Compared to a year ago, productivity rose 2.8% in Q3, up from an upwardly revised 2.4% in Q3 (previously 1.9%). The January employment report contained meaningful downward revisions to employment (and hours) in 2024 and 2025. However, there were no significant revisions to output, meaning that productivity growth was generally revised higher. Since productivity growth began to accelerate at the beginning of 2023, it has grown at a well above trend 2.8% annual rate. Strong productivity is a key factor for boosting real incomes and restraining inflation pressures.

Nonfarm business output increased 2.6% q/q in Q4 on top of unrevised gains of 5.4% q/q in Q3 and 5.2% quarterly in Q2 while hours worked edged down 0.2% q/q in Q4, the first quarterly decline since Q4 2023, versus a 0.2% quarterly increase in Q3 (previously 0.5% q/q). Compensation growth picked up to 5.7% q/q in Q4 from an upwardly revised 3.3% in Q3 (previously 2.9% q/q) in Q3. Compared to a year ago, compensation growth picked up to 4.1% in Q4 from 3.8% in Q3. Accordingly, with the slowdown in productivity and pickup in compensation, unit labor costs increased 2.8% q/q after quarterly decreases of 1.8% and 2.9% in Q3 and Q2, respectively. Compared to a year ago, unit labor cost growth was unchanged at 1.3%, the smallest annual gain since Q3 2023.

Factory output fell 2.2% q/q SAAR in Q4, its first quarterly decline in a year, following a slightly downwardly revised 2.9% in Q3 (previously 3.0%). Hours worked fell 0.3% in Q4, the sixth consecutive quarterly decline, following a 0.6% q/q decline in Q3. Consequently, factory productivity slumped 1.9% q/q, its first quarterly decline since Q3 2024, after having posted solid gains of 3.6% in Q3, 3.2% in Q2 and 4.6% in Q1. Factory compensation growth picked up to 6.4% q/q on top of a 4.8% quarterly jump in Q3. The combination of a decline in productivity and a meaningful rise in compensation led to an 8.3% quarterly surge in manufacturing unit labor costs in Q4, the largest quarterly increase since Q3 2022.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

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- Nonfarm business output per hour rose 2.8% q/q SAAR in Q4 on top of an upward revision to Q3.
- Compensation jumped 5.7% q/q in Q4 resulting in a 2.8% quarterly increase in unit labor costs.

U.S. Productivity Increases More than Expected in Q4

Michael J. Moran

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The headline figure for import prices rose 0.2% in January (annual rate of 2.6%), matching the change in December and continuing a pattern of generally subdued changes. The ups and downs of import prices in the past two years have left little net change, with the year-over-year rate at -0.1% in January.

The flat trend, though, reflected distinctly different patterns in the prices of petroleum products and nonpetroleum goods. Petrol prices have traced an irregular downward path, with notable weakness recently: January marked the sixth consecutive decline. Prices of nonpetroleum products, in contrast, broke from a flat trend most of last year with surges in both December and January.

The distinctly different paths are evident in the chart above (right), which plots the levels of these price indexes rather than the percent changes. (Figures for nonpetroleum prices are not available for October because of the government shutdown.) The break in trend for nonpetroleum import prices is striking. One is tempted to argue that the surge reflects the effects of tariffs, but this is most likely not the case. The figures in this report are based on invoices before the imposition of tariffs, and thus there is no direct effect.

However, one might imagine an indirect effect. If foreign producers wished to absorb the tariff burden to remain competitive in the US market, they could reduce invoiced prices to keep post-tariff prices steady. Indeed, nonpetroleum prices fell in both May and June following the announcement of President Trump’s Liberation Day tariffs. The subsequent easing of the draconian tariffs announced in April might have led importers to return to original prices in recent months, which would now be picked up as higher prices.

On the export side, prices rose 0.59% in December and 0.65% in January (annual rates of 7.3% and 8.0%). The jumps represent a marked deviation from the modest net change seen from March through September last year (October is not available because of the government shutdown). Several components of the headline index remained contained (automobiles, food, industrial supplies), but prices of consumer goods and capital goods surged. The cause of the acceleration is not perfectly clear. Perhaps the soft tone of the foreign exchange value of the dollar in the past year or so offered the opportunity to boost profit margins by raising dollar prices.

These import and export price series are not seasonally adjusted; they can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Nonpetroleum import prices break from a flat trend with jumps in both December and January.
- Export prices also accelerate, led by consumer goods and capital goods.

Export and Import Prices: Upward Pressure Points in January

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Motor vehicle registrations in January fell by 6.1%, while overall retail sales volume, a separate category, fell by 0.1%. Motor vehicle registrations are notoriously volatile; they increased by 1.8% in December and fell by 3.3% in November. Retail sales, however, have been more chronically flat, with no change in November, a 0.2% increase in December, and now a 0.1% decline in January. These numbers are quite weak because they're already inflation-adjusted, expressed in volume terms.

Sequentially volume sales are weakening in the EMU, with the growth rate slipping from 2.1% over 12 months to a 1.4% pace over six months to just a 0.4% annual rate gain over three months. Food sales have been more stable but have been somewhat more erratically weakened over this same period. Motor vehicle registrations have been imploding, falling by 3% over 12 months, dropping to a 12.4% annual rate over six months and plunging at a 27.1% annual rate over three months.

In the unfolding quarter to date, with one month's data in hand, first quarter retail sales are rising at a 0.2% annual rate; food sales are rising at a 2.7% annual rate. Motor vehicle registrations are declining at a 31.3% annual rate.

We can also inspect these data on a country by country basis. We have Germany and the Netherlands from the European Monetary Union, Sweden and Norway representing Northern Europe, the United Kingdom as a nonaligned former monetary union member, and lastly Denmark as an EU member.

Germany is the largest economy in Europe, and its sales fell in January. More disconcerting, sales in Germany are generally on a decelerating path, growing at a 1.2% pace over 12 months, at a 0.5% pace over six months, and contracting at a 1% annual rate pace over three months. The Netherlands, another monetary union member, is experiencing a very different trend, with sales rising by 3.3% in January and then accelerating from 12 months to six months to three months as growth rates have progressed from 1.4% to 6.1% to 8.8%, respectively. In Denmark, a European Union member but not a monetary union member, sales rose by 0.7% in January, while its sequential sales show growth rates of 3.7% over 12 months and 3.8% over six months, and then suddenly weaken to 0.4% over three months.

The United Kingdom is showing a progression of sales that is fairly firm. In January, sales rose by 1.9%. The annual growth rate is at 4.5% over 12 months, easing slightly to 3% over six months, and then jumping to 7.7% over three months.

Sweden and Norway are fellow Northern European economies but do not share the same trends in retail sales. In January, Swedish sales rose by 0.1%, while Norwegian sales rose by 1.1%. The progression of growth rates in Sweden shows sales over 4% over six months and 12 months, with the growth rate decelerating to 2.1% at an annual rate over three months. In Norway, 12-month and 6-month growth rates for sales are at 3% to 4% and then jump to a 7.3% annual rate over three months.

Monthly data on sales volume growth have been irregular. January was the most consistently strong month of the most recent three, albeit with Germany posting a significantly large drop in retail sales, which is disconcerting for the largest economy in the euro area.

The sequential data show sales accelerations in the Netherlands and in Norway juxtaposed once again to Germany, where sales growth rates are decelerating and culminate in declining growth over the most recent three months. Sequential data also show a clear deceleration in sales volumes for the euro area as a whole. In addition, there is a significant sales implosion for motor vehicle registrations on the same timeline.

The quarter-to-date data for the euro area show weak sales growth, while the country level data show sales increasing for all the countries in the table except Germany in the quarter to date, which is a nascent calculation at this point.

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From here on out, the outlook encounters more cross currents since inflation in the euro area appears to be tamer but continues to run at a pace slightly excessive relative to target. Now with a new conflict in the Middle East and concern about oil being able to squeeze through the Strait of Hormuz, there's a more significant question about how much further oil prices might rise, further stoking inflation that is already mildly excessive in most countries that target inflation. There is an additional facet about uncertainty and the impact it will have on growth, although at this point the war in the Middle East appears to be exceptionally well conducted and appears to be quite contained. However, we know that conditions like this can change quickly, although it's not out of the question that this could be an exception.

These factors infuse the outlook with additional elements of uncertainty. Central banks are going to be faced with the question of whether they are going to allow themselves to continue overshooting their targets as they have been doing for some time, or whether they are going to take even mild steps to try to contain what could be spreading inflation pressures.

In Asia, Japan is facing more extreme questions, with its exchange rate having moved strongly and its Prime Minister wanting to put monetary tightening on hold to solidify an economic expansion despite the fact that inflation has been running on the hot side. And in the United States, political pressures continue to tear at the political fabric, and it faces midterm elections at the end of the year; both parties are preparing for and posturing for that event. The year ahead could prove to be interesting in either a desirable or an undesirable way - stay tuned.

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**Geopolitical risk**
The escalation in Middle East tensions has already been reflected in a sharp rise in the Caldara–Iacoviello Geopolitical Risk Index, shown in the first chart below. This index—based on the frequency of geopolitical risk references in major international newspapers—has jumped to levels typically associated with periods of acute international tension. For the global economy, the immediate concern is less the direct economic damage and more the uncertainty generated by the conflict. The Middle East remains central to the global energy system, and concerns over potential disruption to oil infrastructure or shipping routes—particularly through the Strait of Hormuz—have already contributed to a sharp rise in energy prices, with knock-on effects for financial markets and the broader outlook for global growth.

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**The Strait of Hormuz**
The strategic importance of the Strait of Hormuz is highlighted in the next chart below, which shows tanker transit calls through the strait. After rising through February, tanker movements have dropped sharply in the wake of the recent escalation in regional tensions. This narrow maritime corridor is one of the world’s most important energy chokepoints, with roughly a fifth of global oil supply and a large share of LNG exports passing through it each day. But its importance extends beyond hydrocarbons: the Gulf is also a major exporter of petrochemicals and fertilizers such as ammonia and urea, key inputs for global agriculture. Any sustained disruption to traffic through Hormuz would therefore have implications not only for energy markets but also for broader global supply chains.

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**Oil and Natural Gas**
As noted, the sensitivity of energy markets to developments in the Gulf has been evident in the behaviour of both oil and gas prices. The next chart below shows a sharp move higher in Brent crude alongside a pronounced spike in natural gas futures in recent days. While oil understandably attracts most of the attention given the volume that transits through the Strait of Hormuz, natural gas is equally important from a macroeconomic perspective. The Gulf region is a major supplier of LNG to Europe and Asia, and disruptions to shipping routes or regional infrastructure can quickly tighten global gas markets. For Europe in particular—still structurally more exposed to imported LNG following the loss of Russian pipeline supply—higher gas prices feed directly into electricity costs, industrial input prices and household energy bills. In short, the latest escalation is not simply an oil story; it is an energy story more broadly, with implications for inflation, real incomes and growth across the global economy.

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**Global shipping costs and supply chain pressures**
Beyond energy markets, and as also noted above, developments in the Middle East also have the potential to reverberate through global trade and supply chains. The next chart below illustrates this link by comparing the Baltic Exchange Panamax Index—a key benchmark for dry bulk shipping costs—with the New York Fed’s Global Supply Chain Pressure Index. The Panamax index tracks freight rates for vessels typically used to transport bulk commodities such as grains, coal and fertilizers, cargoes that frequently move through or originate from the Gulf region. As such, it provides a useful barometer of shipping conditions that are particularly relevant for the Middle East. Historically, spikes in shipping costs have tended to coincide with periods of heightened supply chain stress, as seen most clearly during the pandemic. Should tensions in the region more forcefully disrupt maritime traffic or insurance conditions for vessels operating near the Strait of Hormuz, freight rates could rise again, potentially amplifying broader supply chain pressures and adding another layer of uncertainty to the global economic outlook.

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**Energy prices and inflation**
Developments in energy markets also matter because of their close connection with inflation dynamics and monetary policy. The fifth chart below compares year-on-year changes in Brent crude oil prices with the Citigroup Global Inflation Surprise Index, which measures whether inflation outcomes are coming in above or below economists’ expectations. Historically, periods of sharply rising oil prices have often coincided with upside inflation surprises, most notably during the pandemic recovery when energy prices surged and global inflation pressures intensified. This relationship highlights why events in the Middle East are being watched so closely by policymakers. A sustained rise in energy prices would risk complicating the disinflation process that many central banks have been trying to engineer. In turn, this could delay or limit the scope for interest rate cuts and tighten financial conditions more broadly, adding another potential headwind to the global economic outlook.

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**Natural gas and electricity generation**
The importance of natural gas to the global economy is further illustrated in the final chart, which shows global per capita electricity generation by source. While renewable energy has expanded rapidly in recent years, fossil fuels continue to play a dominant role in meeting rising electricity demand. In particular, natural gas has become an increasingly important component of the global power mix, reflecting its flexibility, relatively lower carbon intensity compared with coal and oil, and its ability to provide reliable baseload and balancing power. Oil, by contrast, now plays only a very limited role in electricity generation in most economies. This backdrop is especially relevant given the rapid expansion of energy demand associated with artificial intelligence and digital infrastructure. Data centres, cloud computing networks and the broader digital economy require vast and reliable supplies of electricity. While renewables are likely to account for a growing share of new capacity, natural gas is expected to remain a critical bridging fuel in ensuring system stability and meeting peak demand. As a result, disruptions to global energy markets—particularly those affecting natural gas and LNG flows from the Middle East—could have implications that extend well beyond traditional energy markets, potentially affecting the pace at which new digital and AI-related infrastructure can be deployed.

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Geopolitical tensions in the Middle East have escalated sharply following joint air strikes by Israel and the United States on strategic targets in Iran. While the ultimate trajectory of the conflict remains highly uncertain, the episode highlights the potential for geopolitical shocks to ripple through multiple channels of the global economy—from energy markets and shipping routes to supply chains, inflation dynamics and monetary policy. In this week’s _Charts of the Week_, we present six charts that illustrate some of the key issues, implications and points to watch, including movements in geopolitical risk (chart 1), shipping activity through the Strait of Hormuz (chart 2), energy prices (chart 3), global supply chain pressures (chart 4), inflation surprises (chart 5) and the evolving structure of global electricity generation (chart 6). Together they provide a framework for thinking about how events in the region could shape the outlook for the world economy in the months ahead.

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Charts of the Week: Shockwaves from the Gulf

**The Blue Chip Growth Consensus**
The first chart this week tracks the evolution of Blue Chip consensus forecasts for 2026 real GDP growth over the past six months for the United States, China and Taiwan. What stands out is the remarkable stability—and in some cases gradual improvement—in growth expectations, even as the geopolitical backdrop has become more unsettled. A backdrop of intense geopolitical instability in the Middle East historically tends to introduce downside risks to global activity through higher energy prices, shipping disruptions and financial market volatility. Yet the consensus outlook for the world economy has so far remained broadly resilient. One reason may lie in the continuing strength of investment tied to artificial intelligence. Taiwan’s growth outlook has been revised steadily higher in recent months, reflecting its pivotal role in the global semiconductor ecosystem and the infrastructure build-out associated with the AI boom. In that sense, the chart captures an interesting juxtaposition in the current global economy: rising geopolitical uncertainty on the one hand, and a powerful technology-driven investment cycle on the other.

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**Sentiment surveys**
The picture becomes somewhat less reassuring when we turn to global sentiment indicators. The latest Sentix global economic expectations index shows a sharp deterioration in March, interrupting what had been a gradual improvement in global economic sentiment over the past year. Notably, the survey period coincided with the early stages of the recent escalation in tensions in the Middle East, suggesting that rising geopolitical risks may already be weighing on investor and analyst expectations. While the current conditions index remains relatively firm—consistent with the still-resilient growth outlook seen in the Blue Chip forecasts—the sudden downward lurch in expectations is potentially more concerning. Historically, sharp declines in forward-looking sentiment indicators such as this have sometimes served as early warning signals of a softening global growth environment, particularly when they coincide with rising energy prices and heightened geopolitical uncertainty.

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**The Blue Chip Inflation Consensus**
Turning to inflation, the latest Blue Chip revisions suggest that forecasters have so far made only very modest adjustments to their outlook for 2026 consumer prices. As the chart shows, the largest upward revision this month was for India, while smaller increases were recorded for Australia, the euro area and South Korea. Elsewhere, forecasts were largely unchanged. What is notable is the absence of more widespread upward revisions, particularly given the sharp climb in oil prices in recent days following the escalation of tensions in the Middle East. For now, panelists appear to be assuming that the energy shock will prove either temporary or limited in scope. However, should higher oil prices persist—or begin to filter through more broadly into transportation and production costs—this relative stability in inflation forecasts could come under greater pressure in the months ahead.

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**Oil prices and short-dated yields**
The next chart highlights the close relationship that often emerges between energy prices and expectations for U.S. monetary policy. Over the past year, movements in the price of West Texas Intermediate crude have tended to be mirrored—albeit imperfectly—in shifts in the yield on two-year US Treasury notes, a market-based proxy for expectations about the Federal Reserve’s policy path. The correlation between the two series has been relatively strong, reflecting the fact that oil price swings can influence inflation expectations and therefore the outlook for interest rates. Yet despite the recent sharp rise in oil prices associated with the escalation of tensions in the Middle East, there has so far been no comparable move higher in two-year Treasury yields. This relative stability suggests that financial markets may be assuming that the latest oil shock will prove temporary or, at least, insufficient to materially alter the Federal Reserve’s policy trajectory.

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**Oil exposure**
Staying with the theme of Middle East instability, the next chart highlights the varying degree to which major economies remain exposed to fluctuations in global oil markets. Measured as a share of GDP, Japan, China and several major European economies remain significant net importers of crude oil, leaving them more vulnerable to sustained increases in energy prices. Germany, France and Italy all retain notable import dependencies, while the United Kingdom’s exposure is comparatively modest. By contrast, the United States is now close to balance in crude trade, reflecting the transformation brought about by the shale revolution, while Canada stands out as a substantial net exporter. These differences matter in the current environment. Should geopolitical tensions lead to a sustained rise in oil prices, the macroeconomic burden would likely fall most heavily on the large importing economies, particularly in Asia and parts of Europe, where higher energy costs could weigh on growth and complicate the inflation outlook.

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**Oil prices and inflation**
The final chart stays with the theme of Middle East instability by highlighting the extent to which oil price movements tend to feed through into inflation dynamics across Asia. The five-year correlations between Brent crude prices and energy-related CPI inflation are positive and, in several cases, quite strong. Thailand, China and Malaysia show particularly high sensitivities, suggesting that swings in global oil prices are quickly reflected in domestic energy costs. India and Japan also display meaningful correlations, while the relationship is somewhat weaker in Singapore and Taiwan and even slightly negative in South Korea over this period. The broader message is that oil shocks rarely remain confined to energy markets alone. In many Asian economies, they transmit relatively quickly into inflation, potentially complicating monetary policy decisions if geopolitical tensions were to drive a sustained rise in crude prices.

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The past few days have seen financial markets rattled by a sharp escalation of tensions in the Middle East, with oil prices rising, risk assets wobbling and investors reassessing the potential macroeconomic fallout from a possible energy shock. Yet, taken together, this week’s charts suggest that the global economic outlook has so far remained relatively resilient. Blue Chip consensus forecasts for 2026 growth have held steady in recent months, with Taiwan’s steadily improving outlook hinting at the ongoing influence of the global AI investment cycle. That said, forward-looking sentiment indicators are beginning to show some cracks: the latest Sentix expectations index registered a sharp deterioration in March, potentially reflecting rising geopolitical uncertainty. Inflation expectations, by contrast, have shifted only modestly, with forecasters making few meaningful revisions despite the recent surge in oil prices. Financial markets appear to share that view, as movements in two-year US Treasury yields—often a proxy for expectations of Federal Reserve policy—have not mirrored the sharp rise in crude prices, suggesting investors currently see the oil shock as temporary. The final charts highlight why energy markets nonetheless remain central to the outlook: many major economies remain significant net oil importers, and in much of Asia oil price movements feed quickly into consumer energy inflation. Should geopolitical tensions persist and keep crude prices elevated, these channels could yet transmit broader macroeconomic pressures in the months ahead.

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Charts of the Week: Geopolitics Meets the Global Economy

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