US 2026 GDP Growth Revised to 2.1% as US-Iran Conflict Extends

• As the US-Iran conflict enters its fifth week, BMI Fitch has revised its forecast for U.S. economic growth in 2026 downward from 2.3% to 2.1%, while inflation is now projected to average 3% (up from 2.8% previously) and end the year at 2.8% (up from 2.4% previously).
• These forecast revisions stem from a shifted view of the conflict to an ‘Extend to End’ scenario, which entails up to another four weeks of high-intensity military operations without the conflict spiralling out of control. Consequently, the Brent crude price is forecast to average USD78/bbl in 2026 (up from USD70/bbl in the previous view).
• Higher Brent crude prices feed higher gasoline, diesel and jet fuel prices, which all contribute to a higher inflation forecast for 2026. In this scenario, the inflation effect will persist for longer than previously forecast but still show signs of unwinding towards end-2026, leaving the end-year inflation forecast of 2.8% below the annual average (3%).
• The Federal Reserve is now expected to conduct 25bps of monetary policy easing in 2026, down from the previous forecast of 50bps, on account of higher inflation. Rate cuts are expected to pause for longer over worries of lingering inflation and raised inflation expectations, even after the conflict ends. In this scenario, conditions are still expected to merit one rate cut towards end-2026, as inflation moves toward its 2% target while unemployment remains elevated.
• GDP growth has been revised down as higher inflation from increased energy costs will further reduce private consumption and investment growth, amplified by less monetary policy easing. Despite higher oil prices, US oil investment is not expected to increase enough to outweigh the broader negative impact on economy-wide investment.
• Risks to the outlook have increased, with a 45% probability that the conflict shifts to a more damaging ‘Extend to Escalate’ scenario. This would likely increase inflation and reduce growth beyond current forecasts. For monetary policy, risks are two-sided: the Fed may not cut rates at all, or may even increase rates, if inflation risks intensify, but could still cut rates if employment risks rise sufficiently, particularly to avoid a recession.

(Source: BMI, A Fitch Solutions Company)