Questions? We've Got Answers 

Q1. How much damage is the U.S.-Iran conflict inflicting on global growth? 

A sharp oil supply shock has yet to upend the global economy. Higher energy prices and rising uncertainty have trimmed roughly 30 basis points from global growth expectations compared to prior to the conflict. Since the disruption to the Strait of Hormuz has persisted longer than expected since our March forecast, more modest forecast downgrades are in store for the U.S., Canada, Europe, and Japan by roughly 10-20 basis points — noticeable, but not severe. Policy support should help to soften part of the blow. In the U.S., for example, some of our downgrade in real GDP growth to 2.2% reflects the hit to household purchasing power from higher fuel costs. The drag could lessen if measures under discussion are adopted, such as a temporary federal gas tax holiday. In contrast, smaller Asian economies face bigger downgrades. The relatively modest economic impacts are grounded in a key assumption that the conflict resolves diplomatically by the end of the second quarter of 2026. 

The economic resilience that’s unfolding is not an accident. Many economies entered 2026 with momentum and a few important buffers, including large oil inventories. In Asia, strong corporate profits linked to AI-related investment also helped cushion regions that are key manufacturing economies. Elsewhere, several countries most exposed to the supply shock entered this period with ample reserves, fiscal room, or access to alternative energy supply—including China and India. Strong first-quarter growth in China is helping to absorb some of the near-term hit, while India is also getting support from substantial tariff relief announced in the first quarter of 2026.

Our base case forecast sits on a strong assumption — some diplomatic progress occurs by late May, allowing flows through the Strait of Hormuz to recover gradually and oil prices to ease (see forecast in Table 1). But if tanker traffic stays disrupted into mid-year and crude remains above $100 per barrel, the economic hit deepens. Under a prolonged conflict scenario where oil prices average $100 this year rather than the $80 assumed in our baseline (Chart 1), global growth tumbles into the mid-2% range. That’s a far cry from the 3.1% of our March forecast and gets uncomfortably near to a broader downturn (Chart 2). Growth in the U.S. would slow further to 2.1% in 2026 with spillover into 2027. Likewise, a rise in recession fears that manifests into softer demand and tighter financial conditions would place central banks across the world in the cross hairs of responding to the higher inflation and related expectations. The odds would climb that they would need to respond with some modest interest rate hikes.

It will take time for official GDP data to show the full economic damage, so for now we are relying on faster-moving indicators. Among the most useful are manufacturing and services PMIs, especially new orders and input prices that give an early signal on demand and cost pressures. These surveys are already pointing to softer activity in Europe and rising input costs across most major economies. Globally, price pressures are building, delivery times are lengthening under strained supply chains, and new orders are weakening as higher costs squeeze demand and household incomes (Chart 3). Time is not our friend in this outlook. Global resilience hinges on one key unknown: how long the conflict lasts. 

Q2. Do developments in private credit markets warrant concern?

The U.S. private credit market has expanded to approximately $2 trillion, overtaking both the high-yield bond and syndicated loan markets. It now serves as a vital funding source for borrowers below investment grade. But recent bankruptcies and retail withdrawals from Business Development Companies (BDCs) have heightened concerns around valuations, liquidity, and sector concentration.

• Key risks include opaque valuations, limited liquidity, and significant concentration in software and technology borrowers (Chart 4).
• Retail investor participation has increased through semi-liquid BDCs, making the market more sensitive to negative headlines and redemption pressures (Chart 5).

Currently, developments in private credit markets remain contained with liabilities less susceptible to rapid withdrawal. Some added comfort stems from private credit being only 14% of nonfinancial corporate debt and household exposure being minimal. BDC holdings account for less than 0.5% of total household financial assets. The risk of mass withdrawals is mitigated by retail-facing non-traded funds capping quarterly redemptions, and institutional investors — who dominate the market — typically having capital locked up for several years. This structure argues for some orderly liquidation of assets should redemption or funding pressures persist.

By extension, it would be difficult for stress in private credit to be the sole source to destabilize the financial system. In a severe scenario with default rates rising to 10%, this would translate into $200 billion in defaults. Assuming a conservative 40% recovery rate, losses would be approximately $120 billion, likely leading to only a modest drag on GDP and lending^1. However, the main risk stems from indirect transmission channels linked to liquidity and financial conditions, particularly through counterparty exposure. The Office of Financial Research estimates $410–$540 billion in bank and non-bank debt financing for private credit funds and BDCs, plus roughly $300 billion in uncalled commitments from investors such as pension funds and insurers. For pensions, stress would materialize through increased capital calls by fund managers, and losses on private credit investments could put pressure on funding ratios or regulatory capital, potentially resulting in asset sales, such as equities and bonds, to rebalance portfolios.  

For the time being, private credit doesn’t seem to be a primary trigger for significant macroeconomic spillovers but could escalate if compounded by higher credit spreads due to AI-related uncertainty or repricing of AI-related companies. A broader tightening of financial conditions would pose larger risks. 

Q3. What's the risk of a 2022-style surge in inflation?

There are no two ways around it, inflation is rising and will continue to do so in the near term. A doubling in oil prices, a 30% increase in diesel prices and shortages in jet fuel are filtering into the prices consumer pay. And that's just the beginning. Right now we are mostly seeing first-order effects on prices directly tied to these products, but the impact will broaden to second-order effects within broad production and transportation supply chains.

There are several key distinguishing factors today versus 2022. Although energy prices are surging and supply chains are snarled, the magnitude and scope on goods and services is to a far lesser extent compared to 2022. In addition, this cycle lacks the "revenge spending" boom that accompanied the reopening of global economies that were fueled by excess pandemic-era savings. And lastly, labor demand is much weaker than post-pandemic when firms were under pressure to quickly rebuild workforces to meet surging demand (Chart 6). This means far fewer people switching jobs in search of higher wages that pressured employers to pass along those costs to consumers.

We expect the oil supply shock to boost CPI inflation to average 3.6% in the U.S. this year. Markedly higher than the 2.8% projected last December. However, the bleed-through to core prices should be more muted than in 2022 with the demand side of the equation in a very different place.  

Lastly, central banks will be more reactive this time around to quell runaway prices. The pandemic was a once in a century economic disruption, whose effects were not well understood. The word “transitory” frequently described the jump in inflationary pressures, which proved incorrect. The lens of central banks was also blurred by a decade of weak inflation that pre-dated was pandemic and created a bias towards a “wait-and-see” approach on inflation. With their credibility subsequently undermined, policymakers won’t want to make the same mistake again. Many are already sending clear signals that rate hikes will be in the queue if the energy shock does not dissipate. Central banks will set a lower ceiling on what they are willing to tolerate in inflation compared to in 2022.

Q4. What factors will blunt the economic headwinds from the global energy shock?

As discussed in Question 1, the economic impact to the U.S. is smaller relative to Europe and Asia. The shale revolution in the U.S. during the mid-2000s has shifted the dynamics from being an energy importer to a small net exporter, while simultaneously becoming more energy efficient. From a growth standpoint, this means that energy shocks are now a double-edged sword. On one side, a spike in energy prices erodes household purchasing power and raises business input costs – a headwind to output. But on the other edge, it boosts revenues for energy producers (and tax revenues for governments), helping to mitigate the overall hit to growth. This is happening at a time when the U.S. has become less energy intensive, reflecting a transition to a more service driven economy and better energy efficiency (Chart 7).

Beyond the structural factors, American households are well positioned to absorb the energy shock. OBBBA tax cuts are retroactive through 2025, boosting the average household tax refund by about $350. Then there’s the added benefit flowing from the elimination of taxes on tips and overtime pay. Couple these with a labor market showing early signs of strengthening and, normally, you'd have a recipe for a consumer to weather the energy price shock. However, we can also readily observe through sentiment indicators that American consumers are highly price-sensitive in areas of food, gasoline and other items purchased at a higher frequency. As such, this price shock will test the narrative of consumer resilience. We expect U.S. consumer spending growth to hold below 2% in real terms through most of 2026. This speaks of resilience but also marks a step down from 2025's pace. 

Q5. What does it take for the Federal Reserve to raise interest rates due to high energy prices?

Our view remains that the Federal Reserve (Fed) will continue to look through the energy shock if it resolves by June or in short-order. Although the Fed has less runway to be patient than some other central banks.

Prior to the war, U.S. core inflation was running at a robust 4.3% (quarter-on-quarter annualized) through the first quarter. This leaves the economy with a less favorable jump-off to absorb added price pressures. One positive is that the easing cycle was interrupted and a fed funds rate at 3.75% is still considered “restrictive”. It also sits above the median long-run estimate from the Fed's most recent Summary of Economic Projections (SEP). It’s this duality that caused us to remove our rate cut expectations for this year, but also not shift to a rate-hike stance. Assuming the war resolves in the next one-to-two months, the window would open again for the Fed to resume rate cuts in early 2027 (see Table 1).  

That said, as we note in Question 3,  central bankers have been clear that they don't want 2026 to be a repeat experience of 2022. So patience will have its limits if severe energy disruptions from the war drags into the summer.

The exact tipping point that would prompt the Fed to raise interest rates is uncertain. There is still a substantial hurdle for the Fed to pivot from a prolonged pause to a hike. However, a dovish stance is increasingly strained by robust growth and broadening price pressures. For the Fed to pivot to rate hikes a few pillars would need to fall into place. These include a tightening in the labor market (i.e. lower unemployment rate and/or a sustained pick-up in job growth), together with accelerating core inflation measures and rising longer-term inflation expectations.

Q6. What's going on with job creation and what do economies need to grow?

Job creation in U.S. has slowed notably through 2025, but fewer jobs are needed to stabilize the unemployment rate with immigration flows significantly reduced following a post-pandemic surge. This is most evident through labor force growth. Back in 2024, the pace of monthly job creation that would hold the unemployment rate steady (i.e., the breakeven rate) was estimated at 150k. Today, that has fallen to 30k. In other words, there’s a significantly lower bar for what a "good" monthly job figure looks like. And, with the U.S. contending with aging demographics and slower immigration, lower job numbers are the new norm.

Even so, while U.S. payrolls are only 0.2% larger than last year, the pace has accelerated to average 76k new positions per month since December. Although the unemployment rate has held steady in a tight 4.3-4.4% range, this is only a sliver above its long-term target and a sign of tighter labor market conditions.

Lack of growth in the labor supply may be helpful for capping the unemployment rate, but it also means slower growth in hours worked, a key input to overall economic growth. Economists often talk about a concept called "potential growth" or the economy's sustainable, non-inflationary growth rate. Potential growth is typically decomposed into two core components: growth in labor input (hours worked) and productivity. Labor input will have minimal growth over the near-term, raising the importance of productivity. The U.S. has been a leader on that score, with productivity running north of 2% annualized in recent years (Chart 8).  

The ideal state is to have both levers engaged, which is what the U.S. has recently demonstrated. We anticipate the coming years will bring even stronger U.S. productivity growth amid broader adoption of AI.  

Q7. What is the outlook for tariffs and the USMCA review?

The U.S. administration's response to the Supreme Court ruling against its use of the International Emergency Economic Powers Act (IEEPA) was swift. Within hours of the decision, it imposed a temporary 10% global tariff under Section 122 of the Trade Act of 1974, which will expire on July 24th. Section 122 tariffs are used to address large and persistent balance of payments deficits or defend the value of the U.S. dollar but can only last for five months. However, this alternative has also faced legal challenges, with the U.S. Court of International Trade ruling against the tariffs in early May.  

While this increases near-term tariff uncertainty, the administration is already considering more durable alternatives. A more permanent replacement is being explored under two Section 301 tariff investigations targeting over sixty nations. These tariffs are focused on anti-competitive trade practices that were previously only in effect against China. The first of the new investigations relates to allegations of excess production capacity in the E.U and 16 other countries. The cumulative net trade balance of these nations with the U.S. is roughly equal to the U.S. trade deficit with the world (Chart 9).  

The second Section 301 tariff investigation reflects 60 separate investigations against 60 U.S. trading partners, all related to the same allegation of a failure to effectively prohibit the import of goods that were produced using forced labor. Historically, section 301 investigations have taken 12-18 months to complete, but the U.S. Trade Representative (USTR) is pursuing an accelerated schedule to maintain the administration's tariff regime beyond the timeline of the temporary Section 122 tariffs.

As these tariff developments continue to unfold, the first review of the USMCA is expected in July. With roughly a third of U.S. trade covered by the agreement, a material modification could have a significant impact on the North American economy. At this point in time, U.S. officials have suggested that the core elements of the agreement will remain intact, but we expect updates in areas like more stringent domestic content requirements, alignment on trade policies related to China, and stronger partnerships on areas of shared interest (i.e. critical minerals, energy, etc.). The USTR is expected to submit its plans for review to Congress by June 1st, with the formal review scheduled to follow one month later.  

Although our expectation is that trade policy will remain broadly stable in 2026, the numerous developments will keep policy uncertainty elevated. The USMCA review is likely to be challenging and could weigh on business sentiment in all three countries. While the potential threat of withdrawal from the agreement is likely a distant tail risk, mired by legal questions, threats could quickly feed through to business hiring and investment intentions. Currently, the most probable outcome is for the core of the agreement to remain in effect, with concessions offered by Canada and Mexico in exchange for some reduction in certain Section 232 tariffs.

Tables

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Table 1: Interest Rate Outlook

F: Forecast by TD Economics, May 2026; Forecasts are end-of-period.
Source: Bloomberg, Federal Reserve, TD Economics.

Interest Rates	2025				2026				2027
	Q1	Q2	Q3	Q4	Q1	Q2F	Q3F	Q4F	Q1F	Q2F	Q3F	Q4F
Fed Funds Target Rate	4.50	4.50	4.25	3.75	3.75	3.75	3.75	3.75	3.50	3.25	3.25	3.25
3-mth T-Bill Rate	4.21	4.24	3.86	3.57	3.61	3.70	3.65	3.55	3.30	3.15	3.15	3.15
2-yr Govt. Bond Yield	3.89	3.72	3.60	3.47	3.79	3.90	3.80	3.40	3.35	3.35	3.35	3.35
5-yr Govt. Bond Yield	3.96	3.79	3.74	3.73	3.92	4.05	3.85	3.75	3.70	3.70	3.70	3.70
10-yr Govt. Bond Yield	4.23	4.24	4.16	4.18	4.30	4.35	4.25	4.15	4.10	4.10	4.10	4.10
30-yr Govt. Bond Yield	4.59	4.78	4.73	4.84	4.88	4.95	4.80	4.65	4.60	4.60	4.60	4.60
10-yr-2-yr Govt Spread	0.34	0.52	0.56	0.71	0.51	0.45	0.45	0.75	0.75	0.75	0.75	0.75

 

End Notes

1. Goldman Sachs research. "U.S. Daily: Putting Private Credit Risks in Macroeconomic Context". March 23, 2026.