OECD warns Middle East conflict could trigger global recession and higher inflation
A report released on Wednesday by the Organization for Economic Cooperation and Development (OECD) warned that the global economic outlook largely depends on the duration of the conflict in the Middle East. The organization cautioned that a prolonged war could push some countries into recession and lead to a stronger rise in inflation worldwide.
Two Possible Scenarios
Scenario 1: Conflict Ends Soon
If the conflict is resolved in the near term, oil and gas production in the Gulf region could gradually return to pre-war levels from the third quarter onward. In this scenario, energy shortages would remain largely confined to Asia and would be partially offset by strategic reserves and increased shipments from other producers.
Under these conditions, global economic growth is projected to slow from 3.4% in 2025 to 2.8% in 2026 before recovering to 3.1% in 2027. These projections are broadly in line with the OECD’s forecasts published earlier this year.
Scenario 2: Prolonged Conflict
If the crisis continues, disruptions to energy supplies could extend well into next year. Global growth would then slow sharply to 2.1% in 2026 and 1.8% in 2027—rates not seen since major global crises such as the 2008–2009 financial crash or the COVID-19 pandemic in 2020.
Many economies could fall into recession, with Asian countries expected to suffer the greatest impact due to their heavy dependence on Middle Eastern energy supplies.
Inflation and Interest Rates
Higher energy prices resulting from an extended conflict would increase global inflation. The OECD estimates that inflation would rise by 0.4 percentage points in 2026 and accelerate by 1.3 percentage points in 2027. Such pressures could force central banks to raise interest rates by 0.5 to 0.75 percentage points in the short term.
The OECD expects inflation across G20 economies to peak at 4% this year before gradually easing to 3.1% by 2027. Interest rates are expected to remain largely unchanged this year, with cuts anticipated next year.
Global Trade Outlook
The organization forecasts that global trade growth will moderate in 2026 following stronger growth in 2025. However, weaker trade conditions are expected to be partly offset by rising demand for AI-related goods and increased investment in artificial intelligence technologies.
Outlook for Major Economies
United States
US economic growth is projected to ease from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027. Stronger energy exports are expected to partly offset the negative impact of higher energy prices on households.
Euro Zone
Economic growth in the euro area is expected to slow from 1.4% to 0.8% this year before rebounding to 1.2% in 2027. Growth will be supported by expanding defense production and resilient labor markets.
United Kingdom
Economic growth in Great Britain is projected to slow to 0.9% in 2026 before recovering to 1.1% in 2027, supported by stabilization in global trade and easing financial conditions.
China
China’s economy is expected to slow from 5.0% growth in 2025 to 4.5% in 2026 and 4.3% in 2027. Lower US tariffs are expected to support exports, while the country’s substantial energy reserves should help mitigate the impact of higher oil prices.
Japan
According to OECD forecasts, Japan is expected to be among the economies most affected by trade disruptions linked to the Middle East conflict. Economic growth is projected to slow from 1.1% in 2025 to 0.6% in 2026 before edging up to 0.8% in 2027.