A framework agreement between Washington and Tehran has already pulled oil prices lower, but Erste Group's quarterly outlook warns the inflationary scar tissue from the conflict will outlast the crisis itself across the eurozone, the US and emerging markets alike.

The third quarter of 2026 looks set to be defined by relief rather than recovery, according to Erste Group's latest quarterly economic outlook.

The signing of a framework agreement between the US and Iran in June, followed by subsequent negotiations, has already pulled oil prices sharply lower, with futures markets pricing in further declines through the remainder of the year.

"This will ease the burden on consumers and reduce uncertainty among businesses, with positive effects on the economy," the bank's analysts write — but the report also warns that an inflation shock has already done significant damage during the conflict's acute phase and will not unwind nearly as quickly as the oil price itself.

Eurozone weak first quarter, with inflation overshoots

The Eurozone economy contracted by 0.1% quarter-on-quarter in the first quarter of 2026 — a result Erste's economists attribute substantially to volatility in Irish GDP data, itself a casualty of the separate US tariff dispute.

Strip out that distortion and the underlying eurozone economy would likely have grown by approximately 0.2%. The national picture beneath the aggregate was considerably healthier: Spain grew 0.6% quarter-on-quarter, while Germany and Italy each posted solid growth of 0.3%.

"As expected, leading economic indicators continued to decline in April and May due to the Middle East conflict and the resulting rise in energy prices," the report notes, with private consumption identified as the primary channel through which the second quarter is expected to have been dampened.

Now that the US-Iran agreement has been reached, Erste anticipates "a gradual easing of the situation in the energy markets in the third quarter," with growth recovering progressively from there.

The medium-term Eurozone story, in Erste's telling, rests on three supports: rising real wages, a labour market with unemployment at a historically low rate of around 6%, and a wave of fiscal stimulus — Germany's special infrastructure and defence fund, alongside increased defence spending commitments across the EU — that should provide additional impetus to investment growth.

Working against that is the export sector, squeezed simultaneously by US tariff policy and what the report calls "the increased competitiveness of Chinese suppliers in high-tech sectors." Between the conflict-related drag and the one-off Irish data distortion, Erste has trimmed its 2026 Eurozone GDP forecast to 0.5%, with growth expected to accelerate sharply to 1.1% in 2027 as the shock fades from the base.

Inflation is the more uncomfortable part of the eurozone story. Erste expects headline inflation to rise temporarily to an annual average of 2.9% in 2026 because of the Iran war, based on current futures-market pricing for oil and electricity, before falling sharply to 2.2% in 2027 as energy-driven base effects work their way out of the calculation from March of that year.

US investment-led growth, weak consumption, and an inflation problem

The American economy presents a similar pattern of resilient headline growth sitting atop a more fragile consumer base. First-quarter GDP growth accelerated from the prior quarter, but Erste's analysts attribute that almost entirely to business investment — specifically "heavy investment in data centers" — while private consumption "remained weak for the second consecutive quarter, likely as a result of high inflation." That weakness is expected to have deepened through the second quarter as fuel prices, driven by the conflict, weighed even more heavily on household budgets than they had in the first three months of the year.

Assuming the US-Iran agreement holds, Erste expects "reduced uncertainty and falling fuel prices to have a positive impact on the economy in the third quarter," though inflation itself "will continue to weigh on consumers" even as the energy shock recedes. A resilient labour market, with steady employment growth over recent months, offers some offsetting support to consumer spending, and Erste expects the US economy overall to sustain growth of roughly 2%.

US inflation remains "far from the Federal Reserve's 2% target," with the recent surge in fuel prices compounding an already elevated rate driven by tariff pass-through.

Crucially, Erste characterises both shocks — tariffs and the Hormuz blockade — as "price shocks, meaning temporary price increases limited to specific product categories," which should mechanically drop out of the y/y inflation calculation over time.

The risk is contagion: "We are seeing the first signs of this in service prices, which presents upside risks to the inflation outlook."

The bank's base case is that tariff-related price increases fall out of the data in the second half of the year, but that persistent price pressure elsewhere means the overall inflation rate will only decline slowly rather than snapping back toward target.

CEE growth downgraded across the region due to lagging effects

Central and Eastern Europe entered 2026 with most countries growing between 2 and 3%, but the first quarter brought disappointments in Croatia, Czechia and Poland, prompting modest downward revisions, while Slovakia underperformed regional peers with growth marginally below 1%.

Romania is the standout negative case — the only CEE economy to contract in the first quarter, a result of ongoing fiscal consolidation, with Erste now forecasting Romania will be in outright recession for the year.

Hungary and Serbia surprised to the upside, allowing Erste to lift its Hungarian 2026 growth forecast from 1.4 to 1.7%, while a stronger-than-expected start to the year in Slovenia leaves room for an upward revision to its current 1.7% forecast there.

Across the CEE8 grouping as a whole, Erste now expects average growth marginally above 2% in 2026, down sharply from the 2.7% anticipated at the start of the year — and the bank is explicit that "the full impact of the Middle East conflict will likely show up only in the following quarters," meaning the risks to even this lowered forecast are tilted to the downside.

Private consumption remains the principal growth driver across the region, with Romania the sole exception where consumption actually declined, reflecting a collapse in consumer confidence dating to mid-2025 driven by tax increases under the fiscal consolidation programme.

Investment was mixed, falling in both Hungary and Slovakia, though Erste notes Hungary "has great potential for an investment rebound if EU funds are unlocked." CEE8 inflation is now expected to average 3.9% in 2026, higher than initially forecast, though Erste notes encouraging signs of easing in several countries in May, prompting downward revisions to its Hungarian and Polish inflation forecasts specifically.

China and India on divergent trajectories

China's economy grew 5.0% y/y in the first quarter, continuing to lean on fiscal and monetary support, though the report notes a split in sentiment — industrial confidence remains subdued while service-sector sentiment "gained noticeable momentum in April and May."

The IMF's forecasts, cited by Erste, point to a continued gradual slowdown to 4.4% growth in 2026 and 4.0% in 2027. Strategically, Erste flags that China's current five-year plan continues to prioritise industrial capacity expansion and technological self-sufficiency, a trajectory the bank expects will increase pressure on the EU to deploy further protective countermeasures — consistent with a steadily widening EU trade deficit with China.

India is the report's clearest growth outperformer. First-quarter GDP rose 7.8% y/y, comfortably beating the 7.3% consensus, driven by services growth of 9.3%, manufacturing at 7.3% and construction at 8.4%. The IMF expects 6.5% growth for the full year.

Both the manufacturing and services PMIs remain firmly in expansionary territory, with services reaching 59.8 in May — the highest reading since November — supported by e-commerce and IT sector demand.

The clearest drag is cost-side: Indian inflation rose to 3.9% y/y in May, just below the Reserve Bank of India's 4% target, prompting the RBI to hold its benchmark rate at 5.25% for a third consecutive meeting on June 5, while simultaneously raising its 2026 inflation forecast to 5.1% and trimming its growth forecast slightly to 6.9%. The rupee has depreciated roughly 10% against the dollar since the start of the year, a decline the RBI has been actively countering through dollar sales in the foreign exchange market.

Markets in brief

On the financial markets side, Erste expects the European Central Bank to hold rates steady while the US Federal Reserve raises rates in the third quarter, a divergence reinforced by persistent financing needs in both Germany and the US that should keep bond yields from returning to pre-crisis levels — with US yields actually expected to rise further. Erste continues to favour euro-denominated corporate bonds given current spread levels.

On currencies, the bank expects the dollar to strengthen against the euro as Fed rate speculation builds, a modest weakening in the Swiss franc as geopolitical risk recedes, a broadly sideways path for gold, and general — if uneven — support for CEE currencies.

Equity markets have weathered recent volatility well, buoyed by the AI boom alongside broader earnings strength in both the US and Europe; Erste expects further gains overall but stresses stock selection will matter more than index direction, favouring technology, financials and industrials while seeing little potential in consumer staples, healthcare and telecommunications.