OECD Warns of Severe Global Slowdown If Middle East Conflict Is Prolonged — Update

By Paul Hannon

The global economy is set for a significant slowdown this year as higher energy costs weaken consumer spending and business investment, but it could become much more severe if the conflict in the Middle East drags on into 2027, the Organisation for Economic Co-operation and Development said.

In a quarterly report on the global outlook, the Paris-based research body said worldwide output is likely to grow by 2.8% in 2026 if energy production in the Persian Gulf starts to recover later this month and transport through the Strait of Hormuz returns to normal. That would mark a sharp slowdown from the 3.4% expansion recorded last year.

However, a peace deal remains elusive. The U.S. and Iran exchanged heavy fire Tuesday in what was among the most intense fighting in months as diplomatic efforts have stalled.

The OECD said that should the disruption to energy production and shipping stretch well into next year, global growth could slide to 2.1% in 2026 and 1.8% in 2027.

If the latter outcome came to pass, it would be the weakest year of growth this century, with the exceptions of 2020, when the Covid-19 pandemic struck, and 2009, when the global financial crisis hit.

Stefano Scarpetta, the OECD's chief economist, said such a severe outcome isn't likely, but does serve as an illustration of the potential cost to the global economy if it takes a long time to secure a settlement to the conflict.

"This is a really bad, bad shock that would last a long time," he said. "We really hope it doesn't turn out like that. Duration matters a lot for the economic and social consequences."

In this "protracted" scenario, parts of Asia would be among the hardest hit. Much of the energy that usually transits through the Strait of Hormuz is heading for Asian ports. Japan and South Korea, among others, have large reserves of oil that have ensured the economic impact of the Strait's closure has so far been limited.

That would change if the closure was long-lasting. But the impact wouldn't be confined to those countries most reliant on the Gulf for their energy supplies.

"Many economies in Asia are likely to be hit heavily, reflecting their relatively high reliance on energy inputs from the Gulf economies, but higher inflation, shortages, tighter financial conditions and weaker confidence are also likely to weaken growth significantly in Europe and North America," the OECD said.

However, the hardest-hit parts of the global economy would be poorer countries that are heavily reliant on imports of energy and use crop fertilizers that depend on chemicals produced in the Gulf.

"The consequences would be global but could prove especially severe for developing economies with limited energy reserves, higher shares of energy and food in household consumption, constrained fiscal capacity and weak social safety nets, low private savings buffers and more fragile currencies," Scarpetta said.

The OECD said the slowdown could be severe enough to push a number of economies into recession.

Should the conflict prove to be of shorter duration, the OECD continues to expect the U.S. economy to grow by 2% this year, outpacing the eurozone at 0.8% and Japan at 0.6%. It nudged up its growth forecast for China to 4.5% from 4.4% in March.

However, the OECD warned that a protracted disruption to supplies from the Gulf that led to a further rise in energy costs would likely weaken investment in artificial intelligence, which has been a key driver of U.S. economic growth.

It noted that energy accounts for 60% of the costs associated with data centers, while the manufacture of semiconductors requires helium--and a third of the world's supply of that gas comes from the Gulf. In addition, higher energy costs in Asia would hit production of essential equipment.

"The production of...hardware that underpins AI systems is highly electricity-intensive, reflecting the energy demands of advanced lithography, clean-room operations, and cooling systems," the OECD said.

As long as the duration of the conflict proves to be relatively short, the OECD said most central banks don't need to raise their key interest rates. It expects inflation in the Group of 20 leading economies to rise to 4% this year from 3.4% in 2025, but fall back to 3.1% next year.

However, should the conflict prove long-lasting, it expects G-20 inflation to be 4.4% this year and 4.7% in 2027. In response, central banks would likely raise their key interest rates by between half and three-quarters of a percentage point.

The OECD said those central banks that are reducing their portfolios of bonds purchased under quantitative easing programs may have to suspend that process, and may even have to resume QE to calm bond markets.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 03, 2026 03:43 ET (07:43 GMT)