OECD warns protracted war could cut global growth to 1.8% by 2027

A prolonged Middle East conflict could push the global economy to the brink of recession, the OECD warned Wednesday.

The OECD slashed its global growth forecast to 2.8% for 2026 in its June Economic Outlook, warning that a protracted U.S.-Iran war could tip some economies into recession if energy disruptions persist into next year.

"The longer the disruptions last, the larger the economic and social costs become," Stefano Scarpetta, the OECD's chief economist, said in the report.

Under the baseline scenario — which assumes a peace agreement by mid-2026 that swiftly resolves the Strait of Hormuz shutdown — global growth would recover to 3.1% in 2027. But if shipping and energy infrastructure disruptions continue well into next year, growth would collapse to 2.1% in 2026 and 1.8% in 2027, the OECD said. Global inflation would rise by 0.4 percentage points in 2026 and 1.3 percentage points in 2027 under that scenario.

The consequences would be felt most acutely in developing economies with limited energy reserves, higher shares of food and energy in household consumption, and fragile currencies, Scarpetta said. The crisis also shows the vulnerability of global supply chains to a single chokepoint — the Strait of Hormuz handles about 21% of global oil trade — and strengthens the case for diversifying energy supply and accelerating investment in renewables.

The OECD's warning comes as the U.S.-Iran conflict has sent energy prices soaring and pushed up the costs of fertilizers and other key industrial inputs. The Strait of Hormuz shutdown, coupled with energy infrastructure damage throughout the Gulf, has created a supply crunch that the OECD said could persist well beyond any near-term resolution.

The last time a major Middle East conflict disrupted global energy markets — the 1990 Iraqi invasion of Kuwait — oil prices doubled within three months and the U.S. economy entered a recession by July of that year. While the current conflict differs in scale and participants, the OECD's analysis suggests the economic transmission mechanism is similar: an energy supply shock that feeds through to higher inflation, weaker consumer spending, and reduced business investment.

Unemployment would rise and investment — including in energy-intensive artificial intelligence infrastructure — would weaken significantly, with increasing risks of financial market repricing, Scarpetta said. Central banks face a particularly difficult challenge: weaker growth argues for looser policy, but higher energy-driven inflation argues for tighter conditions.

The OECD said emergency demand-restraint measures and international coordination of strategic energy stocks could help mitigate some effects of the supply crunch in the near term. But the longer-term lesson, the organization said, is that the need to reduce dependence on fossil fuel imports "is more urgent than ever."

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