OECD: Conflict in Middle East testing resilience of global economy

The conflict in the Middle East is testing the resilience of the global economy, the Organisation for Economic Cooperation and Development (OECD) said in its Interim Economic Outlook, published on March 26.

The outlook is surrounded by high uncertainty and reflects the interaction of two opposing forces, the OECD said.

On the upside, growth is supported by strong momentum in technology-related investment and production, lower tariff rates than previously assumed, and carry-over from robust outcomes in 2025.

On the downside, the halt in shipments through the Strait of Hormuz and the closure and damage of some energy infrastructure has generated a surge in energy prices and disrupted the global supply of energy and other important commodities, such as fertilisers. This is raising costs, weighing on demand and adding to inflationary pressures.

Global GDP growth is projected to remain broadly stable at 2.9 per cent in 2026 before edging up to 3.0 per cent in 2027, sustained by robust technology-related investment and gradually lower effective tariff rates.

“However, the evolving conflict in the Middle East weighs on growth and generates significant uncertainty around global demand,” the OECD said. “These projections assume that the current energy market disruption is temporary, with prices easing from mid 2026 onward.”

Inflation pressures will persist for longer with G20 inflation now expected to be higher in 2026 than previously projected, reflecting the surge in global energy prices.

Headline inflation in the G20 advanced economies is projected to be 4.0 per cent in 2026, 1.2 percentage points higher than previously expected, before easing to 2.7 per cent in 2027 as energy price pressures fade.

Core inflation in advanced G20 economies is expected to weaken, from 2.6 per cent in 2026 to 2.3 per cent in 2027.

Market expectations point to a gradual decline in energy prices, an assumption underpinning current projections.

“However, a prolonged disruption to shipments through the Strait of Hormuz or sustained closures of oil and gas facilities could lead to significantly worse outcomes,” the report said.

“Simulations in the report explore a scenario where oil and gas prices rise well above baseline projections – by around a quarter in the first year and remaining elevated thereafter – combined with tighter global financial conditions.”

In this case, global GDP could be around 0.5 per cent lower by the second year, while inflation would be higher by about 0.7 percentage points in the first year and 0.9 percentage points in the second, the OECD said.

(Illustration: Jhon Casso)