OECD says protracted war could drag on global growth, push up inflation

• If energy disruptions continue into 2027, higher energy prices could add 0.4 percentage points to global inflation in 2026 and 1.3 points in 2027, likely prompting central banks to hike rates by 0.5 to 0.75 percentage points
• Asian countries reliant on Middle East energy would be hardest hit, with Japan's growth forecast downgraded to just 0.6% in 2026, while China's ample reserves would limit exposure to oil price spikes
• U.S. growth is expected to ease from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027, with stronger energy exports partly offsetting the drag from higher consumer prices

Summary

The OECD warns that a protracted Middle East war poses significant risks to global economic growth and inflation. The organization projects global growth at 2.8% in 2026 and 3.1% in 2027 under a baseline scenario where the conflict remains short-lived, down from 3.4% in 2025.

Key Projections:

If the war extends into 2027, growth could plummet to 2.1% in 2026 and 1.8% in 2027—levels comparable to the 2008-2009 financial crisis and COVID-19 pandemic. Some economies, particularly Asian nations dependent on Middle East energy, could face outright recession.

Inflation and Monetary Policy:

A prolonged conflict could add 0.4 percentage points to global inflation in 2026 and 1.3 percentage points in 2027, potentially forcing central banks to raise interest rates by 0.5-0.75 percentage points. Under the baseline scenario, G20 inflation is expected to peak at 4% in 2025, declining to 3.1% in 2026.

Regional Outlook:

• United States: Growth easing from 2.1% (2025) to 2.0% (2026) and 1.8% (2027)
• Eurozone: Slowing from 1.4% to 0.8% in 2026, recovering to 1.2% in 2027
• China: Declining from 5.0% (2025) to 4.5% (2026) and 4.3% (2027), buffered by energy reserves
• Japan: Among hardest hit, dropping from 1.1% (2025) to 0.6% (2026)
• UK: Slowing to 0.9% in 2026, recovering to 1.1% in 2027

The report notes that AI-related goods demand, especially in Asia, may partially offset trade moderation following a strong 2025.