OECD warns global growth may slow to 2.6% on infrastructure risk

A temporary ceasefire in the Middle East has calmed oil markets, but the global economy’s recovery hinges on the uncertain extent of damage to energy infrastructure, the Organisation for Economic Co-operation and Development said.

"What worries us is the damage to infrastructure," Stefano Scarpetta, the OECD's chief economist, said. "We do not really know the extent of this damage, and the time it will take to repair."

The two-week ceasefire announced Wednesday saw Brent crude fall back below $100 a barrel, offering some relief to businesses and consumers. However, the OECD’s baseline forecast, which assumes energy prices fall, could be derailed. Should the conflict lead to a prolonged period of high energy prices, the organization warned that global growth could slow to just 2.6 percent this year, down from a pre-war projection of 3.2 percent.

The conflict's true economic fallout now depends on how quickly the Strait of Hormuz, a chokepoint for about 20 percent of the world's oil, can return to normal. Any significant impairment to production facilities or transport capabilities would mean higher energy prices for a longer period, even with the strait open.

A Cautious Return

Even with a ceasefire holding, supply chains are not expected to normalize immediately. Wayne Snyder of Blue Yonder said a full recovery could take one to two months, depending on how efficiently backlogs are cleared and how insurers respond to the new risk environment.

"In the short term, we are more likely to see a gradual increase in vessel traffic rather than a sudden surge," Snyder said. Priority will likely be given to delayed oil tankers and other high-priority shipments. Lingering security risks, such as unexploded mines, and uncertain insurance costs could further temper the pace of recovery.

Energy and Food Prices at Risk

The most immediate economic impact has been the surge in freight costs and oil prices, which feeds into all sectors. However, the disruption also threatens the supply of fertilizers, creating a knock-on effect on global food prices and crop production.

This is a particular concern for grocers and food producers, as disruptions to the fertilizer supply chain can take months to filter through to crop yields and wholesale prices. UK supermarket Iceland has already warned that further cost inflation linked to the instability could translate into higher prices for consumers. While oil prices have seen a quick reaction to the ceasefire, the OECD and other analysts believe the recovery for key goods like fuel and food inputs will play out over the coming quarters.

This article is for informational purposes only and does not constitute investment advice.