OECD sees weaker growth, higher inflation if Mideast war drags on

The Organisation for Economic Co-operation and Development (OECD) has linked global economic stability to the duration of the Middle East war, warning that prolonged conflict could push some countries into recession and drive inflation to crisis levels. Under a worst-case scenario, global growth could plummet to 2.1% in 2026 and 1.8% in 2027—comparable to the 2008 financial crash or COVID-19 pandemic—with inflation rising by 0.4 percentage points in 2026 and 1.3 points in 2027. Central banks may respond with emergency interest rate hikes of 0.5 to 0.75 percentage points, while one-third of OECD economies could see real wage declines, eroding living standards. In a more optimistic baseline scenario, where the conflict remains short-lived, global growth would slow from 3.4% in 2025 to 2.8% in 2026 before rebounding to 3.1% in 2027—aligning with the OECD’s March forecast. Gulf oil and gas production could recover by the third quarter, though Asia would still face shortages mitigated by strategic reserves and alternative suppliers. Inflation in G-20 economies would peak at 4% in 2026 before easing to 3.1% in 2027, with interest rates expected to hold steady this year before cuts next year. Regional impacts vary sharply: the U.S. would see growth dip slightly from 2.1% in 2025 to 2.0% in 2026, supported by stronger energy exports despite higher household costs. Europe’s eurozone growth would slow from 1.4% to 0.8% in 2026 before rising to 1.2% in 2027, as labor markets and defense spending offset fiscal austerity. Britain’s growth is projected to fall to 0.9% this year before recovering to 1.1% in 2027, aided by stabilizing trade and easing financial conditions. Asia faces mixed outcomes: China’s growth would slow from 5.0% in 2025 to 4.5% in 2026 and 4.3% in 2027, with energy reserves shielding it from oil shocks, though a property slump persists. Japan, however, would see growth drop from 1.1% to 0.6% in 2026 before edging up to 0.8% in 2027—a downgrade from March—due to trade disruptions linked to the Gulf conflict. The OECD urged Japan to implement a credible plan to rein in public finances amid rising interest rates. Türkiye’s 2026 growth forecast was also trimmed to 3.1% from 3.3%, citing weaker domestic demand and high energy prices. Trade growth would moderate globally after a strong 2025, but demand for AI-related goods—particularly in Asia—could provide partial support. The OECD emphasized that the longer the conflict drags on, the greater the economic and social costs, complicating policy responses. OECD Secretary-General Mathias Cormann highlighted the human toll, noting that negative real wage growth in one-third of member economies would directly harm living standards.