The U.S. economy regained some momentum at the start of 2026, expanding at a modest 2% pace from January through March after recovering from last fall’s 43-day federal government shutdown. But the outlook appears to be clouded by the Iran war.

The Commerce Department reported Thursday that gross domestic product (GDP), the nation’s output of goods and services, rebounded from a lackluster 0.5% expansion the last three months of 2025.

The federal government’s spending and investment grew at a 9.3% annual rate in the first quarter, adding more than half a percentage point to growth after lopping off 1.16 percentage points in fourth-quarter 2025.

Growth in consumer spending, which accounts for 70% of U.S. economic activity, slowed to 1.6% in the first quarter from 1.9% at the end of 2025. Spending on goods, including food and clothing, fell slightly. Spending on services slowed.

But business investment, likely driven by spending in artificial intelligence, rose at an 8.7% pace.

A weak housing market continues to weigh on the economy. Residential investment fell at an 8% annual pace – the fifth straight quarterly drop and the biggest since the end of 2022.

Excluding housing, nonresidential investment surged 10.4%, the biggest jump in nearly three years.

An uptick in imports, which rose at an annual rate of 21.4% from January-March, slashed more than 2.6 percentage points off first-quarter growth.

“This is a split-screen economy,” Heather Long, chief economist at the Navy Federal Credit Union, wrote.

“Companies and investors involved in AI are on fire. Meanwhile, middle and moderate-income households are struggling with high gas prices … Consumption is slowing as people are struggling to manage all their bills and growing more concerned about the future.”

Still, a category within the GDP data that measures the economy’s underlying strength grew at a solid 2.5% clip, accelerating from 1.8% in the fourth quarter of 2025. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.

The first quarter included about a month of the clash in Iran. Iran has blocked the Strait of Hormuz through which a fifth of the world’s oil and liquefied natural gas passes. That has driven energy prices higher, fueling inflation and hurting consumers. The Federal Reserve, announcing Wednesday that it was keeping its benchmark interest unchanged, cited “a high level of uncertainty″ arising from the conflict.

Carl Weinberg, chief economist at High Frequency Economics, did not even bother to forecast first-quarter GDP growth.

“The truth is that we do not have any defensible basis for trying to project how these indicators will print,” Weinberg wrote in a commentary Monday.

“President Donald Trump’s war with Iran has led to a total blockade of the Strait of Hormuz. We do not know how to model the impact of that event, as we have never seen anything quite like it.″

Thursday’s report was the first of three Commerce Department estimates.

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In last week’s policy meeting, the Turkish central bank suggested that inflation in April is being driven mainly by rising energy and food prices, while the underlying trend is expected to increase slightly.

The summary of the bank’s policy-setting meeting at which it kept interest rates steady was shared on Thursday.

Warning of “uncertainties” amid geopolitical developments and elevated energy prices in March and April, the Central Bank of the Republic of Türkiye (CBRT) said, “Leading indicators suggest that in April, consumer prices will be driven by energy and food prices, whereas the underlying trend will increase slightly.”

“Domestic energy prices posted a substantial rise on account of price increases in natural gas and electricity for households,” it added.

Official inflation data is due to be released next week. The annual inflation rate in March was at 30.87%, compared to 31.53% in February.

“Brent crude oil prices generally trended upward in both March and April,” the bank noted.

On Thursday, the prices reached the highest since the war between the U.S., Israel, and Iran started two months ago, touching briefly $126 before easing.

Among others, the CBRT also pointed out that risks related to the Strait of Hormuz, coupled with the search for alternative routes, “led to longer lead times, and security risks caused higher insurance premiums and freight rates in March. “

Moreover, it said that inflation expectations and pricing behavior continue to pose risks to the disinflation process, as it cited that inflation expectations rose in April.

“Given the size of price volatility and supply constraints in commodities, the uncertainty over the inflation outlook has substantially increased. The effects of these developments and domestic energy prices on the inflation outlook through the cost channel and economic activity are being closely monitored,” it said.

The central bank also said it would tighten its policy stance “if there is a significant and persistent deterioration in the inflation outlook.”

“In case of a significant and persistent deterioration in the inflation outlook, which can also be driven by the recent developments, the monetary policy stance will be tightened. The committee reiterated that it remains highly attentive to upside risks on inflation.”

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Surging oil prices driven by the Iran war pushed Europe’s inflation higher in April, while economic growth remained sluggish, according to official data on Thursday, creating a troubling mix for both consumers and policymakers at the European Central Bank (ECB).

Annual inflation in the eurozone – the 21 countries that use the shared euro currency – rose to 3% from 2.6% in March, fueled by a 10.9% increase in energy prices, the European Union statistical agency Eurostat reported Thursday.

Crude oil traded above $120 per barrel on Thursday, up from around $73 before the outbreak of the war on Feb. 28.

Meanwhile, eurozone growth for the first three months of the year disappointed, with a marginal increase in economic output of 0.1% over the quarter before.

The war is dealing a huge shock to the global economy because Iran has blocked the Strait of Hormuz, the waterway through which around 20% of the world’s oil formerly passed on its way to customers from producers in the Persian Gulf. The surge in oil prices has been quickly reflected at gas stations and in the price of jet fuel.

Rising inflation has raised concerns that it may become built into the economy along with slow or nonexistent growth, a policy conundrum dubbed “stagflation” that leaves central banks like the ECB with few attractive choices. The usual antidote to inflation is for the central bank to raise its benchmark interest rate, but that can slow growth by raising credit costs for buying things.

ECB policymakers left their benchmark interest rate unchanged Thursday, even though the annual rate of inflation is now clearly above the bank’s target of 2%. The bank’s benchmark rate has been unchanged at 2% since June 2025.

ECB President Christine Lagarde said at a post-decision news conference at the bank’s headquarters in Frankfurt that the bank’s governing council had debated a rate rise on Thursday. She said the council would revisit the bank’s stance with new information at the next meeting on June 11, without committing to any particular path for rates.

Although some economists have used the term recently, she said the eurozone was not facing stagflation like that afflicting Western economies after the oil shocks of the 1970s.

Lagarde said the situation today was not comparable, with inflation less ingrained and a stronger labor market supporting an economy that is not in recession. She said the term was “something that I park in the ’70s… this is not something we’re seeing for the moment.”

“We don’t apply that flashy term, ‘stagflation,’ to the circumstances that we have.”

Western economies suffered high inflation after twin oil shocks from the 1973 Arab oil embargo against the US and the 1979 Iranian revolution – bad memories revived by the Hormuz closure.

Other central banks are also on pause. The Bank of Japan (BOJ) and the U.S. Federal Reserve (Fed) both left rates unchanged at meetings this week, and the Bank of England (BoE) also held steady on Thursday.

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Weeks of conflict have worsened Iran’s already fragile economy, raising the risk of severe postwar fallout, but the country appears capable of withstanding a standoff in the Gulf for now despite a U.S. blockade that has choked off energy exports.

With major fighting paused by an April 8 truce, Iran is locked in a stalemate with the United States and Israel. Talks for a lasting cease-fire are stalled while Tehran keeps the Strait of Hormuz shut and Washington blocks Iranian Gulf ports.

Despite heavy damage to infrastructure and industries and ⁠an oil-export squeeze, Iran has plentiful internal supplies, steady trade with neighbors and only limited signs of immediate stress from state-revenue losses caused by the blockade.

If U.S. President Donald Trump expects Iran to blink first in their game of economic chicken, with global inflation rising and midterm elections approaching, he may be waiting a ​while.

Resistance economy

“I think that they have calculated a longer runway than I think economists or Western policymakers are anticipating,” said Sanam Vakil, head of the Middle East program at the Chatham House thinktank in London, referring to Iran’s ​leaders.

Facing what they see as an existential threat to the country, Iran’s ruling clerics and Revolutionary Guards are able to use their iron grip on the country to hold out for a sustainable deal from ​Washington, Vakil said.

“They are quite known to use repressive capacity. They’re relying on people using their savings,” she said, adding that Tehran was falling back on its “resistance economy” approach ⁠of relying on internal resources and trading across land borders.

The extent of economic damage from the war – and the likelihood of imminent economic crisis – are hard to gauge given the lack of reliable official data and a partial internet blackout ​since January.

Vakil said she anticipated a double-digit drop in Iran’s GDP this year. The rial currency, ​which fell by 70% last year, worsening inflation that contributed to mass protests in January, has dropped by 15% over recent days, but after stabilizing through March, is not far off its prewar value.

There are few other indications of immediate fiscal stress. The authorities have not curbed bank withdrawals, rationed fuel or food staples, or delayed state-salary payments. Supermarket shelves remain full, and offices and banks have stayed open.

Shipping data from April 13 to 25 showed only around 300,000 barrels of oil per day moved out into the Indian Ocean from over ​1 million bpd loaded onto tankers during that period. Storage capacity is limited but energy analysts believe Iran may be able to go another two months before curbing production.

Iran built up extra revenue through energy sales when sanctions were ​waived earlier in the war. Limited volumes of oil are being shipped overland, but not enough to replicate the blockaded sea routes.

A senior source at Iran’s Central Bank told Reuters the country had substantial gold reserves, “tons of it,” that it could deploy if needed ‌and that after ⁠decades of evading sanctions, Tehran knew how to maintain imports by paying a little more.

“Iran is the largest food importer in the region. But it is also important to note that Iran is the least food-insecure country in the region,” said Ishan Bahnu, head agricultural commodities analyst at Kpler.

With an expected better-than-usual harvest approaching, the need for wheat imports is reduced, Bahnu said, reducing vulnerability to any extension of the maritime blockade to grain shipments and putting off some foreign currency spending.

The U.S. blockade has so far been limited to Gulf ports, not Iran’s Chabahar on the Arabian Sea, and has focused on oil tankers, Bahnu said, citing monitored vessel movements.

Officials in Türkiye, Iraq and Pakistan told Reuters there was no ​indication of a slump in cross-border trade yet. Russia has ​also boosted trade across the Caspian this year, shipping ⁠500,000 tons of corn, 180,000 tons of barley and 4,000 tons of wheat across the inland sea from January to March, according to Russian Agriculture Ministry data, bypassing blockaded Gulf ports.

Intense economic pain

As Trump’s threats of military action increased in January, Iran increased imports to stockpile six months’ worth of essentials, the parliament’s agriculture commission head Mohammad Javad Asgari said ​in state media this month.

Soon after the conflict began, the Iranian central bank introduced a support package waiving penalties for late payments of small loans and raised bank withdrawal limits to ​reassure depositors.

Still, on the streets ⁠of Tehran, the economic pain is intense. Iranian businesses have been crushed by high prices, supply chain disruption and the internet blackout, causing spiralling unemployment.

“Rising prices of basic goods, especially products like ours that are directly linked to people’s tables definitely put pressure on people,” said Abbas Smaeelzade, a rice and grain seller. Smaeelzade estimated that his sales had fallen by around 40% since the war began.

Mechanic Hossein Amiri said far fewer customers were bringing cars to his workshop compared to before the war. “Our business has ⁠basically come to ​a standstill,” he said, warning that things could get far worse.

Hanging over the authorities is the fear of another round of mass protests. Thousands of demostrators died in January’s unrest.

To avert the impending economic disaster, Iran would need to include sanctions relief in any deal with Washington, Vakil said.

“They do need access to their foreign currency abroad that is housed in banks around ​the world, but also a degree of sanctions relief. They need to ramp up oil sales, but also be able to trade properly,” she said.

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Türkiye’s foreign trade gap widened 56% on an annual basis in March to $11.2 billion (TL 506.07 billion), as imports weighed over exports, official data showed Thursday.

Exports fell 6.4% to $21.9 billion compared with the same month last year, while imports rose 8.2% to $33.1 billion, according to figures from the Turkish Statistical Institute (TurkStat) and the Ministry of Trade.

The export-to-import coverage ratio dropped to 66.1% in March from 76.5% a year earlier.

In the first quarter, exports decreased 3.2% year-on-year to $63.2 billion, while imports increased 4.7% to $91.9 billion.

The trade deficit widened 27.5% in the January-March period to $28.7 billion, with the coverage ratio falling to 68.8% from 74.4% in the same period last year.

Excluding energy products and non-monetary gold, exports declined 5.5% in March to $20.3 billion, while imports rose 11.2% to $25.7 billion. The resulting deficit in this category stood at $5.4 billion, with total trade volume rising 3.2% to $46 billion.

Manufactured goods accounted for 93.7% of total exports, followed by agriculture, forestry and fishing at 3.7%, and mining and quarrying at 1.9%.

On the import side, intermediate goods made up 70% of total imports, while capital goods accounted for 14.6% and consumption goods for 14.9%.

Germany remained Türkiye’s largest export market in March, with shipments totaling $1.82 billion, followed by the United Kingdom ($1.42 billion), the U.S. ($1.38 billion), Italy ($1.22 billion) and France ($996 million).

China was the top source of imports at $4.76 billion, followed by Russia ($3.51 billion), Germany ($2.54 billion), Switzerland ($1.62 billion) and the U.S. ($1.52 billion).

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Financial markets are increasingly struggling to put aside the economic impact of the Iran war, as the ongoing shutdown of the Strait of Hormuz extends the biggest-ever disruption to energy supplies.

Two months into the conflict, the global economy faces a toxic ⁠mix of slowing growth and high inflation – stagflation.

Even as tech ⁠stocks lift world shares, analysts warn that the longer Hormuz remains shut, the greater the recession risk for energy-importing regions.

“The probability of a recession in Europe, the U.K., and parts of Asia is higher than is priced into equity markets,” said RBC BlueBay’s ​head of market strategy Mike Bell.

Here is how the risks are shaping up across markets:

Oil watch

Oil ⁠remains the key barometer.

Before Thursday, Brent crude was trading at around $112 a barrel, more than 50% above pre-war levels, and continues to rise as the war drags on. Early on Thursday, it reached the highest level since the conflict started, surpassing $125 before easing moderately.

High energy prices threaten growth by squeezing consumers and companies while fuelling inflation.

Citi says it’s considering an adverse scenario in which Brent climbs to $120 through year-end, cutting global growth to between 1.5% and 2% and lifting headline inflation to nearly 5%.

Gas prices in Europe and Asia have also risen. Farmers face a second surge in fertilizer prices in four years, while countries including Sweden have warned of potential jet fuel shortages.

Financial conditions

Despite sharply higher borrowing costs, the shock has yet to show up clearly in overall financial conditions.

Market-based measures – which track how asset prices affect funding availability and future growth – tightened to their most restrictive levels since last spring in the U.S. in March, but have since stabilised, helped by April’s equity rally, according to a closely watched Goldman Sachs index.

Conditions have tightened modestly in the eurozone and Japan, driven by rising ⁠borrowing ⁠costs. Britain stands out, with a much sharper tightening that points to a heavier growth hit.

U.S. faces more inflation

The impact varies by exposure to energy flows through Hormuz. In the U.S., gas prices are now below pre-war levels.

Jefferies chief European economist Mohit Kumar said both the scale and nature of the stagflation shock differ across regions.

“Inflation will still be higher in the U.S., but that’s an oil price impact; the impact on growth is much less in the U.S. than in Europe.”

U.S. business activity picked up in April, though output prices jumped. Consumer inflation expectations for the year ahead jumped to 4.7% this month from 3.8% in March, while market-based gauges have also moved higher.

JPMorgan CEO Jamie Dimon said this week that the worst-case scenario of stagflation remained.

Europe in a tight spot

Europe’s reliance on energy imports ⁠leaves it especially vulnerable, with data already pointing to a stagflationary hit.

Data on Thursday is expected to show eurozone inflation nearing 3%. Contracting business activity, tighter bank lending criteria, and surging inflation expectations signal mounting pressure.

Germany’s IMK institute sees a 34% chance the bloc’s largest economy slips into recession in the second quarter, up from 12% in ​March.

ING’s head of global macro, Carsten Brzeski, said another month of Hormuz disruption would likely trigger at least a technical eurozone recession.

U.K. business activity ​has held up better so far, but risks are rising. The International Monetary Fund (IMF) hit Britain with the biggest growth downgrade among rich economies.

Reflecting inflation worries, borrowing costs in Europe have risen faster than elsewhere as traders bet on higher U.K. and eurozone rates. Britain’s ⁠two-year yields are ‌up 90 basis points ‌since the war began.

Equity markets, perhaps more focused on growth, are down 4% in the euro⁠zone and 5% in Britain, while U.S. shares have risen.

Asia hit hard, China outlier

Asia, which typically takes about 80% of Gulf oil exports and 90% of LNG shipments, is bearing the brunt. Parts of South and Southeast Asia are already facing energy shortages.

Foreign ​investors are pulling out of Thailand, and the Philippines is ⁠among the hardest hit, and Indian companies could be under pressure.

Elsewhere, the Bank of Japan raised its ⁠inflation forecasts and looks set to raise rates.

China is the exception. Backed by ample oil reserves and a diversified energy mix, it grew ⁠5% in the first quarter. Investors are ​betting on Chinese battery and electric vehicle companies, while low inflation has helped Chinese bonds rise as others fell.

Still, China is not immune. Higher energy costs could squeeze already thin factory margins just as global demand for its exports slows.

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