Key facts
- Global growth expectations have been reduced by approximately 30 basis points due to the U.S.-Iran conflict.
- Higher energy prices and uncertainty from the conflict are trimming global growth.
- Smaller Asian economies face bigger downgrades than larger economies.
- If oil prices average $100 per barrel for the year, global growth could fall into the mid-2% range.
- Manufacturing and services PMIs indicate softer activity in Europe and rising input costs globally.
- Central banks may need to respond to higher inflation with modest interest rate hikes.
Global growth expectations have been reduced by approximately 30 basis points due to the ongoing U.S.-Iran conflict and the resulting oil supply shock, according to TD Economics. Higher energy prices and increased uncertainty have trimmed growth forecasts for the U.S., Canada, Europe, and Japan by an estimated 10-20 basis points. Smaller Asian economies are expected to face larger downgrades.
The economic resilience observed is attributed to factors such as large oil inventories, strong corporate profits linked to AI-related investments in Asia, and ample reserves or access to alternative energy supplies in other exposed countries like China and India. China's strong first-quarter growth and India's tariff relief are also providing support.
However, TD Economics' base case forecast assumes diplomatic progress by late May, allowing for gradual recovery in flows through the Strait of Hormuz and easing oil prices. If tanker traffic remains disrupted into mid-year and crude oil stays above $100 per barrel, the economic impact would deepen, potentially causing global growth to fall into the mid-2% range. This scenario would also slow U.S. growth further and impact Canada's economy.
Faster-moving indicators like manufacturing and services PMIs are already signaling softer activity in Europe and rising input costs globally. Price pressures are building, delivery times are lengthening due to strained supply chains, and new orders are weakening as higher costs reduce demand and household incomes. The duration of the conflict remains a key unknown determining the extent of the economic damage.
In July 2026, the Federal Reserve held policy steady with a hawkish bias, as the 30-year Treasury yield reached its highest level since 2007 and the S&P 500 experienced its second consecutive monthly decline. By August 2026, the 10-year Treasury note yield climbed to 4.75%, while West Texas Intermediate crude oil pushed through $90 a barrel by early September. Gold prices surged above $4,400 an ounce during August.