The global economic outlook hinges on how long the war in the Middle East lasts, with recession in some countries and sharply higher inflation a real possibility if it drags on into next year, the Organisation for Economic Co-operation and Development warned on Wednesday.
If the conflict proves short-lived, Gulf oil and gas production could gradually return to pre-crisis levels from the third quarter, with shortages confined to Asia and cushioned by strategic reserves and shipments from other producers.
In that baseline scenario, global growth is projected to slow from 3.4% in 2025 to 2.8% in 2026 before picking up to 3.1% in 2027, broadly in line with the OECD's March forecasts.
"The longer the disruption lasts, the greater the economic, but also the social cost of this crisis, and it certainly will make policy changes much more difficult," OECD chief economist Stefano Scarpetta told a press conference.
Some economies could fall into outright recession, with Asian countries reliant on Middle East energy supplies expected to be hit hardest.
In the protracted disruption scenario, higher energy prices could add 0.4 percentage points to global inflation in 2026 and 1.3 percentage points in 2027, likely prompting central banks to hike interest rates by 0.5 to 0.75 percentage points in the short term.
In the baseline scenario, the OECD forecast that inflation across G20 economies would peak at 4% this year before slowing to 3.1% next year, with interest rates largely on hold this year and cuts expected next year.
"Around one-third of OECD economies are projected to experience negative real wage growth this year. Workers in these countries will see their living standards fall, which is the human reality behind the inflation numbers," OECD Secretary General Mathias Cormann said.
Global trade growth is set to moderate following a strong 2025, though robust demand for AI-related goods and investment, especially in Asia, should provide some support.
UNEVEN OUTLOOKS ACROSS MAJOR ECONOMIES
In the baseline scenario, stronger energy exports are expected to support U.S. growth, partly offsetting the drag from higher prices on household purchasing power. Growth is projected to ease from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027.
In Europe, euro zone growth was seen slowing from 1.4% to 0.8% this year before rising to 1.2% next year, as resilient labour markets and higher defence spending help offset government belt-tightening.
In Britain, growth is projected to slow to 0.9% this year before recovering to 1.1% in 2027 as global trade stabilises and financial conditions ease.
In Asia, China was seen slowing from 5.0% growth in 2025 to 4.5% in 2026 and 4.3% in 2027, with ample energy reserves limiting exposure to oil price spikes. Exports are set to benefit from lower U.S. tariffs and a competitive tech sector, although a property slump remains a drag.
Japan is expected to be among the hardest-hit by trade disruptions linked to the Gulf conflict, with growth slowing from 1.1% in 2025 to 0.6% in 2026 before edging up to 0.8% in 2027, a downgrade from March.
While subsidies will help cushion the energy shock, the OECD said Japan needs a "clear and credible" plan to rein in public finances over the medium term as interest rates rise.
Source Name : Economic Times