A prolonged conflict in the Middle East risks triggering a new wave of economic strain across developed markets, with higher energy prices feeding into inflation, weaker growth and deteriorating public finances, according to Fitch Ratings.

The agency said the impact would be felt most acutely across Europe and Asia, where many economies remain exposed to imported fossil fuels and already elevated debt levels.

“A prolonged Middle East conflict could create new credit challenges for developed market sovereigns in Europe and Asia, primarily through higher energy and borrowing costs, rising inflation and weaker economic growth,” Fitch said.

At the centre of the risk is the trajectory of oil and gas prices. “Higher-than-expected oil and gas prices, feeding into higher inflation, would be the most direct channel of contagion,” Fitch said, pointing to knock-on effects on real incomes and domestic demand.

While its baseline assumes Brent crude will average $70 a barrel in 2026, Fitch warned that a sustained rise to $95–$100 per barrel could materially weaken growth. “A simulation using the Oxford Economics Global Economic Model suggests that an alternative scenario… would slow growth across DMs, potentially bringing some countries close to recession,” it said.

The inflationary impact would not be evenly distributed. “Our simulation suggests that inflation risks are most acute in Italy, the UK, Japan and France,” Fitch said, while “the adverse economic growth impact is greatest for Korea, Japan, the UK and Italy,” reflecting the hit to household consumption from rising energy and transport costs.

Smaller developed markets would also face uneven effects, with central and eastern Europe and Taiwan particularly exposed. By contrast, “Norway is the only country that is insulated, reflecting its energy-exporter position and stronger terms of trade under higher hydrocarbon prices,” Fitch said.

The fiscal response is likely to compound pressures. Governments are expected to intervene with measures such as subsidies, tax rebates and price caps. “The fiscal cost of such interventions can be material and would add to budget deficits,” Fitch said, particularly given that debt levels and financing costs have already risen in recent years.

Market conditions have already begun to tighten, with “eurozone government bond yield spreads… risen by an average of 29bp since February 27”. If sustained, this would increase refinancing costs and further strain public finances.

Despite these risks, Fitch does not foresee an immediate crisis. “We do not view these dynamics as creating near-term ‘fiscal cliffs’ for DMs,” it said, though it warned that prolonged energy shocks could erode governments’ room for manoeuvre.

Monetary policy is also likely to be constrained. “Central banks’ willingness to raise interest rates to curb energy-led inflation effects would be constrained by the weaker demand and employment outlook,” Fitch said, suggesting limited divergence from current rate paths even in a higher oil price environment.