Brussels – The war in the Middle East, and especially the conflict in Iran, is reshaping business expectations, with companies now more pessimistic about their business prospects. Market operators fear rising costs and prices, leading to lower revenues and reduced access to bank credit. This is what emerges from an analysis conducted by the European Central Bank’s experts, and published on its blog. The data was collected through interviews conducted between 19 February and 1 April, i.e., before and after the attacks by the United States and Israel on Iran, thus enabling a mapping of the shift in opinion.
According to the analysis, in the two weeks leading up to the outbreak of the war, firms expected their selling prices and non-labour input costs to rise by an average of 3 per cent and 3.9 per cent, respectively. For firms surveyed after 28 February, however, the figures rose to 4.1 per cent for sales price expectations and 7.7 per cent for input costs, with expected increases of 1.1 percentage points and 3.8 percentage points, respectively. A similar pattern was also observed regarding inflation: firms surveyed before the outbreak of the war in Iran expected average annual inflation of 2.5 per cent, while after the conflict, firms raised the bar to 3 per cent.
It is worth noting that the war and the associated rise in energy prices and supply disruptions led to a substantial upward revision of short-term inflation expectations. Median three-year and five-year inflation expectations, by contrast, remained unchanged. This means that, when the survey was conducted – i.e., up to 1 April – firms did not expect the inflationary pressure to persist in the medium to long term.
The survey conducted by ECB staff on business sentiment is no coincidence: firms’ expectations regarding costs, prices, and the broader macroeconomic environment “are central to their decisions on wages, investment and employment,” the document emphasises. These decisions, in turn, “determine how economic shocks are transmitted to the economy.”
It is no coincidence, the ECB’s economists continue, that business sentiment regarding turnover, investment, and bank loan availability over the next three and six months has taken on “a noticeably more pessimistic outlook” among the companies surveyed following the outbreak of war in Iran. Energy-intensive firms in particular (transport and construction) fear that banks will be less risk-tolerant and therefore less likely to grant loans, leading to reduced optimism across the board (revenue and investment).
In short, with the war in Iran, the data suggests that “the conflict has led firms to reassess their near-term business outlook.” The good news is that “the stability of wage expectations and longer-term inflation expectations suggests that, so far, firms do not anticipate the shock becoming persistent.” This is also because, so far, “the deterioration in sentiment has been concentrated among firms operating in energy-intensive sectors.”
English version by the Translation Service of Withub
