The Iran war energy shock is seeping deeper into the European economy, creating a dilemma as it simultaneously weighs on growth and pushes prices higher, according to latest data from Reuters. Euro zone activity contracted at its sharpest rate in over two-and-a-half years in May, with the S&P Global Flash Euro Zone Composite PMI falling to 47.5 from 48.8 - its lowest since October 2023. This marks the second consecutive month of contraction across the bloc's private sector, as a surge in living costs hammered demand in the dominant services sector and pushed input price inflation to its highest in three-and-a-half years. The European Commission downgraded its growth projections for the euro zone economy and acknowledged they could fall further if energy prices only reach their peak by the end of this year.
Economist Gita Gopinath has issued a stark warning that India could face higher fuel prices, rising inflation and slower growth if the West Asia conflict continues into June, with crude oil potentially climbing to $140 a barrel. Speaking to India Today TV, Gopinath said the crisis has evolved beyond rising prices into a broader supply shock affecting oil, LPG, LNG and fertilisers. She warned that even if tensions ease soon, supply chains could take two to three months to normalise, with crude prices potentially staying at $140 a barrel in June. For India, higher crude prices would raise transport, manufacturing and fertiliser costs, while also putting pressure on inflation and the rupee.
According to reports from LiveMint, Systematix brokerage warns that India may be entering a stagflationary phase as slowing growth, persistent inflation, and widening balance-of-payments stress converge. The recent ₹3 per litre fuel price hike and rising wholesale inflation could push CPI inflation toward the 6–7% range in the second half of FY27. Systematix adds that the RBI may face increasing pressure to reverse monetary easing, while the rupee could weaken beyond the ₹100 mark, weighing on rate-sensitive sectors such as BFSI, real estate and capital-intensive industries. Gopinath noted that inflationary pressures are likely to intensify in the coming months, with the economist saying "We are entering a phase where inflation will keep creeping up."
The rupee has weakened from around ₹91 per dollar in February to nearly ₹97, but Gopinath argued that depreciation helps reduce imports during external shocks. "When the currency depreciates, it helps you with the adjustment that you need, which is you cut back on imports," she explained. However, she cautioned against aggressive currency intervention despite India's strong forex reserves, saying "If you try to intervene, all that happens is you lose your reserves." Gopinath suggested that governments may not be able to fully shield consumers from the energy shock, with the economist noting that "having fuel prices go up at the pump will deliver the behavioural change that you need."
According to LiveMint reports, Mohit Gulati, CIO and Managing Partner at ITI Growth Opportunities Fund, said stagflation creates a difficult environment for stocks as economic growth slows, inflation rises, and employment weakens. Such conditions typically hurt corporate earnings, compress valuations and trigger foreign capital outflows. However, Gulati believes India remains structurally resilient due to its large, consumption-driven economy and the rising aspirations of its 140 crore population, which continue to support domestic demand even amid global macroeconomic disruptions. Gopinath maintained that "This is definitely not a moment to panic" and rejected suggestions that India was heading into a full-scale crisis, citing strong domestic demand, infrastructure spending and healthy forex reserves.
As reported by LiveMint, Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd, said stagflation negatively impacts equities because high inflation weakens consumer demand while rising input costs squeeze corporate margins, leading to slower earnings growth. However, he added that India currently faces no major risk of stagflation. In the worst-case scenario, he expects India's GDP growth to moderate to around 6% and inflation to rise to about 5.5% in FY27, levels that do not indicate a stagflationary environment for Indian markets. Gopinath also suggested that vulnerable households and small businesses may require targeted support if the crisis deepens, backing more cash transfers to vulnerable households, while also supporting guaranteed loans and liquidity support for small firms.
