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The writer is Rene M Kern, professor of practice at the Wharton School, chief economic advisor at Allianz and chairman of Gramercy Funds Management.
Stronger stagflationary winds are blowing through the global economy as oil prices rise above $100 per barrel. The latest US employment figures on Friday provided evidence – albeit mixed – of a weakening labor market, just as the conflict in Iran raises concerns about a price shock from rising energy prices and disrupted supply chains.
The US economy lost 92,000 jobs in February, while the unemployment rate rose to 4.4 percent. This followed a big “beat” a month earlier, which, as I feared, turned out to be an anomaly. After a year 2025 marked by the weakest average monthly job growth in more than two decades following a recession, the employment landscape remains challenging.
It’s not just about the labor market. Inflation also provided warning signals before the start of US-Israeli attacks on Iran. Previously released data showed the personal consumer expenditures price index – the Federal Reserve’s preferred inflation measure – rose to 2.9 percent in December, the highest level since March 2024. Meanwhile, core producer price inflation, a measure of input prices, rose to 3.6 percent, well above the consensus forecast.
And now many economies face the dual pressures of rising energy costs and renewed supply chain disruption on maritime and air routes. Despite these rising risks, many market segments treated the spread of war in the Middle East as a “flesh wound” – a temporary and quickly reversible disruption to an otherwise resilient global economy. After all, this was the profitable approach for a 2025 that saw one shock after another.
The yield on ten-year US government bonds was quoted at 4.13 percent on Friday, approximately at the level of the middle of last month. In between, it had fallen to about 3.95 percent. To the casual observer, this “tour” suggests that the overall influence of the competing forces on what is arguably the world’s most important financial measure is essentially minimal. Yet this netting approach too easily ignores the history of ‘tipping points’, underestimating the increasing risks that demand the attention of policymakers and long-term investors. In the real economy and the financial world, the negative factors are not compensated; they compound.
It’s notable that while a geopolitical earthquake like the Iran war would traditionally have triggered a flight to safety in US Treasuries, yields have risen due to inflation concerns.
The magnitude of the shock the world faces will depend on the duration and spread of the war in Iran. Further disruption to supply chains will undoubtedly lead to a further shift from ‘just-in-time’ efficiency to the more expensive, but necessary, ‘just-in-case’ approach to inventory management. It is a structural evolution that entails higher costs in the system, at a time when affordability is already an economic, political and social issue.
The financial outlook is also challenging due to three different risks. Neither seems large enough to cause systemic risk. Together, however, they can form a self-reinforcing, destabilizing force.
The first concerns private credit in advanced economies. What started as idiosyncratic stress at some companies threatens to evolve into a broader issue as some investors move toward exits from an asset class that Apollo’s Marc Rowan says is facing a “shakeout.” There have been signs of an overloaded sector: poor underwriting, questionable valuations, unsuitable investment vehicles and fraud. The emergence of questionable “continuation vehicles” – where private capital groups move assets between funds – is unlikely to delay the inevitable valuation reckoning.
The second concerns the risks surrounding the rational bubble that drove massive funding for AI development. The technology remains an extremely exciting transformative force with enormous productivity promise. But there will be some big winners and many losers. And payments company Block’s much-publicized decision to reduce its workforce by 40 percent has reminded us that AI adoption risks workforce disruption.
A third risk is that with inflation rising, the global bond market’s ability to absorb record supply is likely to be tested. Three of the seven G7 economies – France, Japan and Britain – have already been challenged by ‘bond vigilantes’ in recent years. If they are not careful, they and many highly indebted companies could find their financing terms less favorable.
The global economy is not just looking at a volatile 2026. It is heading towards further fragmentation and greater dispersion of outcomes across households, sectors and countries.
