Shipping through the Strait of Hormuz has largely halted — and that stoppage is already hitting European factories and airlines, Mark Dowding of RBC BlueBay warns. He says the closure and wider supply shocks have pushed up the chance of a European recession, pointing to airlines cutting schedules and manufacturers trimming output as evidence. Dowding adds that markets look detached from on-the-ground weakness and expects the ECB to raise rates in June and September, with the Bank of England possibly forced to follow.

Supply chains and the Strait

Dowding says the immediate economic shock is unfolding through global trade routes. With the Strait of Hormuz described as closed in his note, airlines have pared back schedules and some manufacturers have cut production because critical components or fuel supplies aren’t arriving. Those disruptions are showing up outside the US first — in Europe and parts of Asia — because those economies are more exposed to the physical bottlenecks the conflict has created.

  • Fewer ship and flight routes push up transport and input costs for firms that import intermediate goods and fuel.
  • Firms face squeezed margins or the choice to curtail output, which can delay payrolls and investment plans.
  • Dowding notes the US is relatively insulated from the physical shortages, which helps explain why US equity indices can remain strong even as activity weakens elsewhere.

Shipping in the Gulf is largely at a standstill in his view, with tangible effects on delivery times and inventory cycles for exporters and importers in Europe and Asia.

Markets versus reality

Dowding says meetings with Washington policymakers revealed a gap between what officials were hearing and what seems priced into markets. In other words, market moves — particularly rallies in equities and credit — may not reflect the full scale of the growth shock building outside the US.

He cautions against using US market strength as a universal signal for risk appetite. The S&P’s relative strength, he argues, shouldn't be taken as a green light for buying risk assets in economies where activity is under more direct pressure.

Mastheads

The same vulnerability applies to several Asian markets that rely on just-in-time supply links and have less spare capacity to absorb a stop-start shock; equity and credit markets in those regions could be mispriced for emerging growth weakness.

Central banks and policy tensions

Dowding expects the ECB to raise interest rates in June and again in September despite an impending growth shock, arguing policymakers may feel compelled to act because inflationary pressure from higher commodity costs could persist even as activity slows.

He sees the Bank of England as likely to follow, albeit reluctantly, creating a policy dilemma: tighter monetary policy aimed at curbing inflation will also push on borrowing costs at a time when growth is weakening from supply constraints. Higher rates make servicing debt more expensive for governments and companies alike.

That combination — slowing activity and higher rates — is the textbook environment in which recession risk rises, and Dowding’s view is the growth hit is building week by week as Gulf shipping stalls and commodity prices respond.

UK politics and gilt markets

Dowding flags an explicitly political channel of risk for the UK, writing that a change of Labour leadership after May could produce a policy agenda that clashes with bond-market constraints. He warns such a clash could create the conditions for stress in gilt markets.

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Dowding expects the ECB to raise interest rates in June and again in September; he said the Bank of England may be forced to follow.

This article was created with AI assistance.