The OECD has warned that escalating conflict in the Middle East could push the global economy into recession and fuel higher inflation.
A report released Wednesday by the Organisation for Economic Co-operation and Development warns that the global economic outlook will largely depend on how long the conflict in the Middle East persists. The organization cautioned that an extended war could push several economies into recession while fueling a significant rise in inflation worldwide.
Two Possible Outcomes
Scenario 1: Conflict De-escalates
If hostilities ease in the near term, oil and gas production across the Gulf region could gradually return to pre-conflict levels beginning in the third quarter. Energy shortages would likely remain concentrated in Asia and be partially offset by strategic reserves and increased supplies from other producers.
Under this scenario, global economic growth is expected to slow from 3.4% in 2025 to 2.8% in 2026 before recovering to 3.1% in 2027. These figures are broadly consistent with the OECD’s earlier forecasts.
Scenario 2: Conflict Persists
A prolonged conflict would result in more severe disruptions to global energy supplies, potentially extending into next year. In that case, world economic growth could fall sharply to 2.1% in 2026 and 1.8% in 2027—levels comparable to those recorded during major global shocks such as the 2008–09 financial crisis and the COVID-19 pandemic.
The OECD warns that many countries could slip into recession, with Asian economies facing the greatest risks because of their heavy reliance on Middle Eastern energy imports.
Inflation and Interest Rates
Sustained increases in energy prices would add to inflationary pressures worldwide. The OECD estimates that inflation could rise by 0.4 percentage points in 2026 and by 1.3 percentage points in 2027. In response, central banks may be forced to raise interest rates by between 0.5 and 0.75 percentage points in the short term.
Across G20 economies, inflation is expected to peak at 4% this year before gradually easing to 3.1% by 2027. Interest rates are projected to remain largely unchanged in the near term, with rate cuts anticipated next year.
Global Trade Outlook
The OECD expects global trade growth to moderate in 2026 following stronger expansion in 2025. However, weaker trade activity could be partially offset by growing demand for artificial intelligence-related products and increased investment in AI technologies.
Outlook for Major Economies
United States
The US economy is projected to grow by 2.1% in 2025, slowing to 2.0% in 2026 and 1.8% in 2027. Higher energy exports are expected to cushion part of the impact of elevated energy prices on consumers.
Euro Area
Growth in the euro zone is forecast to slow from 1.4% to 0.8% before recovering to 1.2% in 2027. Increased defense production and resilient labor markets are expected to support economic activity.
United Kingdom
The UK economy is projected to expand by 0.9% in 2026 before accelerating to 1.1% in 2027, aided by improving global trade conditions and easing financial pressures.
China
China’s growth is expected to moderate from 5.0% in 2025 to 4.5% in 2026 and 4.3% in 2027. Lower US tariffs are likely to support exports, while substantial strategic energy reserves should help limit the impact of higher oil prices.
Japan
Japan is expected to be among the economies most exposed to trade disruptions stemming from the Middle East conflict. Growth is forecast to slow from 1.1% in 2025 to 0.6% in 2026 before recovering modestly to 0.8% in 2027.
