Iran War Risks 1970s-Style Stagflation, Chief Economist Warns

“This Feels Like a Protracted Wound, Not a Quick Bruise”

Natixis Chief Economist for Asia Pacific Alicia García Herrero warns the US–Iran war has ignited a structural energy shock that could trap the global economy in a 1970s-style stagflation spiral — with Asia, and Malaysia, firmly in the crosshairs

BY TENGKU NOOR SHAMSIAH TENGKU ABDULLAH

March 17, 2026

KUALA LUMPUR, When the United States and Israel launched coordinated air and naval strikes against Iran on 28 February 2026 — the opening salvo of what Washington designated Operation Epic Fury — global energy markets convulsed almost immediately. Within days, Brent crude surged past the US$100 threshold for the first time in years, driven by the near-total shutdown of the Strait of Hormuz, the narrow waterway through which roughly a fifth of global seaborne oil flows.

What began as a military campaign rapidly escalated into an economic emergency of potentially historic proportions.

Now in its third week, the conflict shows no signs of de-escalation. Iranian defensive capabilities have proven more resilient than early Pentagon projections anticipated, while hopes of a swift resolution have largely faded.

At the time of this interview with TNS News, Brent crude was hovering between US$107 and US$110 per barrel, shipping rates across Asian routes had surged, and finance ministries from Tokyo to Kuala Lumpur were scrambling to model contingencies for a conflict few had fully war-gamed.

Into this uncertainty steps Alicia García Herrero, Chief Economist for Asia Pacific at Natixis and one of the most closely monitored economists in the region.

Based in Hong Kong, García Herrero brings deep global experience spanning the International Monetary Fund, the Bank of Spain and BBVA, alongside advisory roles to the Hong Kong Monetary Authority and the Spanish Government. Her message is unequivocal.

“Maybe the Strait of Hormuz will not be blocked forever, but the underlying worry of the GCC in trouble is clearly a problem for Asia.”

García Herrero’s central thesis is stark: this is not a short-term disruption.

“Even if the US kind of leaves early because of the elections, it’ll be a mess for the Gulf,” she says. “My impression is that the war will be protracted for Gulf states.”

This matters profoundly for Asia. The Gulf Cooperation Council economies are not merely energy suppliers — they are trade partners, investment corridors and key financial linkages. Instability in the Gulf transmits quickly across Asian economies.

Crucially, she warns that current oil prices are not the peak, but the beginning.

The implications for monetary policy are immediate and severe.

“With no quick end in sight to the war, central banks will have little choice but to hold rates higher for longer — or even tighten — if expectations get unanchored,” she says. “Rate cuts? Forget about it anytime soon.”

Rising oil prices and prolonged conflict risks are pushing the global economy toward a 1970s-style stagflation scenario, with Asia — including Malaysia — facing heightened economic vulnerability.

For emerging Asia, the pressure is even greater. Cutting rates risks currency depreciation; holding them risks choking already slowing growth.

“This has all the hallmarks of a 1970s-style stagflation trap — exactly the toxic mix central banks dread and struggle to fix.”

With approximately 20 per cent of global seaborne oil flows affected by disruptions at Hormuz, alternative routes via the Suez Canal, around the Cape of Good Hope or through pipelines remain costlier and insufficient.

García Herrero warns that markets may still be underestimating where this is heading.

If the conflict persists or escalates, oil in the US$120 to US$150 range is not a tail risk but a plausible scenario, as inventories drain and alternatives prove inadequate.

The economic transmission is rapid. Aviation and shipping costs spike first, followed by freight and logistics. Food prices rise through higher transport and fertiliser costs, while manufacturing absorbs rising input and distribution expenses. The ripple effects could spread across the global economy within quarters.

Perhaps most striking is her warning of stagflation.

“This has all the hallmarks of a 1970s-style stagflation trap,” she says, “persistent energy-driven inflation clashing with growth-killing supply shocks and tighter policy.”

Unlike a temporary spike, this resembles a structural shift echoing the prolonged oil shocks of the 1970s.

Asia faces disproportionate exposure due to its dependence on Middle Eastern energy.

“Asia, especially heavy importers like China, India, Japan, and Southeast Asia, faces brutal vulnerability,” García Herrero says. “Prolonged disruptions mean sustained high import bills, currency pressure, wider deficits, and forced belt-tightening that could shave off meaningful growth while stoking domestic inflation.”

Malaysia’s position is more complex.

While higher oil prices boost PETRONAS revenues, García Herrero stresses that this advantage is outweighed by domestic pressures.

“For Malaysia, the exporter side offers some revenue upside, but it is outweighed by the downside as a subsidised-fuel nation,” she says. “Higher prices mean bigger subsidy costs, higher transport and living expenses, and inflation — a clear net economic burden if this persists, even with partial fiscal offsets.”

This creates a difficult policy trade-off between fiscal discipline and cost-of-living pressures.

Looking ahead, García Herrero delivers her most consequential warning.

“A hundred-dollar-plus oil becomes the new sticky floor for years.”

The implications are far-reaching — from trade costs and industrial policy to energy security and geopolitical alignment.

For Asia, this means accelerating diversification strategies. For Malaysia, it presents both an opportunity to strengthen its role as a regional energy supplier and a governance challenge in managing fiscal sustainability.

García Herrero offers no easy optimism.

“The outlook is dim,” she says. “This feels like a protracted wound, not a quick bruise.”

Alicia García Herrero is Chief Economist for Asia Pacific at Natixis, Senior Fellow at Bruegel, and non-resident Senior Fellow at the East Asian Institute, National University of Singapore. She advises the Hong Kong Monetary Authority’s research arm and serves on the Council of Advisors on Economic Affairs to the Spanish Government.

• TNS NEWS