Hormuz energy shock forces Europe into stagflation — Chinese exporters lose their last advanced-economy demand engine

The downgrade is unusually large. A 30bp cut to growth alongside a 110bp lift to inflation in a single forecast cycle is the steepest stagflationary revision Brussels has published since the 2022 gas crisis. The Commission cited the Hormuz disruption — shipping traffic blocked since 28 February — as the dominant channel, eroding household real income by ~1.2pp and lifting industrial input costs across German chemicals, Italian manufacturing, and French utilities. Brent has fallen 5% this week on US-Iran peace signals but remains 38% above pre-crisis levels.

Second-order effects are sharper than they appear. The ECB faces a textbook policy bind: cutting into 3% CPI is untenable, holding into 0.9% growth invites a recession label. 5-year EUR swap spreads have widened 18bps month-to-date as markets price policy paralysis. Across the Atlantic, Warsh's sworn-in hawkish tilt has pushed Fed Funds futures to imply zero cuts through year-end and a 14% probability of a September hike — widening the transatlantic policy divergence to its sharpest since 2018.

For Chinese outbound capital, three vectors matter. First, Q1 2026 China exports to the US fell 16% YoY; the EU was meant to absorb the diversion — that pillar now weakens. Second, RMB stability (USD/CNH at 6.80) depends on a stable euro; a stagflationary EUR risks renewed CNH pressure. Third, Belt & Road energy partners (Iran, Gulf) are now strategic — but politically radioactive — assets.