A major energy shock has washed over the global economy. But how the biggest players are currently faring has more to do with where they stood before the wave hit, as Allworth Chief Investment Officer Andy Stout explains.
Every country in the world is paying more for energy right now, but not every country is hurting equally. The conflict in the Middle East, which escalated in late February, has pushed oil above $90 a barrel and disrupted supply chains on nearly every continent. How each country or region responds to this shock depends on whether it produces its own oil, entered the year on solid economic footing, and has a central bank that can delay rate hikes.
The impact on the world economy could have been far worse. When the Strait of Hormuz was effectively closed in February, some analysts warned crude could reach $150 or even $200, which would have likely tipped many countries into a deep recession. Instead, oil sits around $90 for a few reasons: the world’s largest oil producer, the United States, has been pumping more, while the largest importer, China, has been buying much less. The two biggest players in the oil market have absorbed the blow in opposite ways.
While that explains the oil price, the following examines the growing distance between the economies managing the shock ... and those being managed by it.
United States: The Deepest Cushion
No major economy is better insulated from this particular shock than the United States, and the reason is structural. The U.S. is a net energy exporter, meaning that when oil prices rise, we keep much of the income rather than sending it abroad, as oil-importing nations must. Recent data show that U.S. oil companies have increased daily exports from four to five million barrels over the past month. That translates into a real economic advantage.
Higher energy prices by themselves could have a destructive impact on labor, but due to various tailwinds, that has not occurred. The job market has rebounded this year from its near stall speed in 2025, when monthly job gains averaged below 10,000. However, employers have added 188,000 new jobs over the past three months.
Meanwhile, consumer prices (CPI) have jumped 4.2%, mostly due to the spike in oil prices. Core prices, which strip out food and energy, are also running hot. With a labor market gaining momentum and inflation elevated, the Federal Reserve has no room to cut rates.
Even though the Fed can’t cut rates, the economy is expected to grow just north of 2% in 2026 due to investment in AI infrastructure by the largest technology companies and steady consumer spending. The U.S. economy faces some headwinds, but it’s the best positioned of the major economies to navigate this environment without losing its momentum.
Eurozone & the UK: Thin Margin for Error
Europe sits at the opposite end of the spectrum in its ability to handle the energy squeeze, as it imports most of the energy it uses. Entering 2026, the Eurozone (which doesn’t include the U.K.) was already losing speed, with its Q4 GDP declining 0.2% on a quarter-over-quarter unannualized basis. In Q1, GDP returned to positive territory but grew only 0.1%. The U.K. was in slightly better shape, growing 0.6% in Q1. However, its recently published April GDP showed a 0.1% contraction. For all of 2026, growth in the Eurozone and the U.K. is forecast to be less than 1%.
This is not a good position for the region to be in when oil spikes. Against that fragile backdrop, Eurozone inflation climbed to 3.2% in May, its highest since September 2023, with the core measure pushing up to 2.5%.
With low-to-no growth and rising inflation, the region is experiencing the textbook definition of stagflation. This has trapped the European Central Bank in a corner. If the ECB raises rates, that could help reduce inflationary pressures but could also weaken its already frail economy. Policymakers have decided to hike rates despite a weak economy because inflation leaves them no choice. On June 11, the ECB raised its target rate from 2.15% to 2.40%, and officials have not ruled out another increase as soon as July, with markets pricing in a 37% chance of a hike next month.
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Japan: Long-Awaited Progess Runs into a Roadblock
After decades of fighting deflation, Japan had finally generated the durable wage growth and steady price increases it long sought. That hard-won progress is why the Bank of Japan has lifted interest rates four times from -0.1% to 0.75% since early 2024. To be clear, the BOJ wants to keep increasing rates to escape the near-0% level it's been trapped at since the mid-1990s. However, higher rates are welcome because the economy is growing, not because higher oil is forcing a move.
First-quarter economic growth of 1.8% annualized supports the case for higher rates, but the energy shock muddies the water. Japan produces almost no oil, and roughly 95% of what it imports comes from the Middle East. Higher energy costs will cause consumer spending patterns to shift. This environment has resulted in the BOJ lowering its 2026 full-year GDP projection from 1% in January to 0.5% in April. Simultaneously, the bank increased its inflation forecast from 1.9% to 2.8%.
Japan wanted inflation, but it did not want this kind. It’s a thin line between healthy normalization and an energy-driven overshoot.
China: A Different Kind of Pressure
China is a bit of an outlier in this story. It has cut crude imports by about three million barrels a day in May compared with recent years by drawing on reserves and expanding its EV and rail networks. This is a major reason oil hasn’t spiked to the $150-200 level many economists feared. Nonetheless, there is a broader inflation impulse in factory prices (+3.9%) due to higher energy and chip costs. Manufacturers have absorbed that and domestic demand has been tepid, resulting in consumer inflation remaining very low, around 1.2%.
The most important variable for China in the second half of this year isn’t oil; it’s Washington. President Trump’s visit to Beijing in May produced a truce that yielded reduced tariffs and a Chinese commitment to buy $17 billion of U.S. agricultural products annually through 2028. Under the surface, the relationship does not look as promising as the headlines suggest. The U.S. is investigating Chinese labor practices, and AI chip restrictions have kept tensions high.
Full-year GDP is forecast at 4.6%, down from 5% in 2025, which still looks solid by global standards. The growth is being carried by exports and investment, however, not by consumers.
What a Divided World Means to You
One global shock, very different regional outcomes, each determined by conditions that were in place before crude spiked. The U.S. had a cushion; Europe had none; Japan was already moving in its own direction; and China was wrestling with problems energy prices barely touch.
A global economy this uneven does not lend itself to a single call. It requires a deep understanding of how diverging growth, inflation, and monetary conditions interact across economies.
How these crosscurrents interact with your own risk tolerance, concentrated stock positions, need for downside protection, and tax situation is where the real complexity that matters to you lives. Our role is to help translate a complicated global picture into a portfolio built for your circumstances