A stark new warning about the global economy: Inflation is headed higher and growth lower

By Jules Rimmer

OECD shaves economic-expansion forecasts for the U.S. and Europe, warning of inflationary threat stemming from war in Mideast

Attendees photographed Wednesday at the OECD 2026 Ministerial Council Meeting at the organization's headquarters in Paris.

The Organization for Economic Co-operation and Development trimmed its growth forecasts for the U.S. and the world economy as a whole, warning of "a significant downside risk to the outlook that persistent disruptions to exports from the Middle East that raise energy prices even further than assumed."

The upshot of this scenario is spelled out clearly: It could add to inflation and reduce growth. Lower-than-expected returns from AI investment could mean more volatility and increased risks to financial stability.

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Geopolitical risk has spiked amid the Iran conflict, significantly disrupting energy markets.

The OECD is an intergovernmental policy forum of 38 democracies advocating economic growth, free trade and social well-being. Its latest quarterly economic outlook, published Wednesday, reported overall nervousness about the challenges facing the global economy - in particular, the hostilities in the Middle East.

These uncertainties led the OECD to shave its growth forecast for the U.S. economy in 2027 from 1.9% - already below the 2% consensus, according to FactSet - to 1.7%. The moderation in growth from this year's projected 2% is owing to a slowdown in real income growth and consumer spending.

Global growth remained resilient prior to the conflict.

Europe is seen as far more vulnerable to higher energy prices because of its heavy dependence on imports. It could see a 20-basis-point reduction in growth from the previous estimate of 1.2%.

The breadth and duration of the Iran war remain uncertain but add "markedly" to business costs and boost consumer-price inflation.

Two factors complicate matters: First, even though U.S. bilateral tariffs have declined since the Supreme Court ruled against Donald Trump, the effective rate remains well above that prevailing before last year's "liberation day." Second, increases in energy prices and supply-chain disruptions come as inflation is stubbornly above target in places such as the U.S., the U.K., Brazil and Mexico.

All these challenges will result in worldwide GDP growth moderating from 3.3% in 2025 to 2.9% in 2026, according to the OECD. It's also obliged the organization to lift its inflation forecast for 2026 from 2.8% to 4%.

David Rosenberg, founding partner of Rosenberg Associates, highlighted what might happen if there's a prolonged disruption to energy supplies.

In a note to investors sent Wednesday, Rosenberg pointed out that this event could cause "a +2.1% global real GDP growth backdrop this year and +1.8% next, which would classify as a world recession. Adding insult to injury, it thinks there are +50 to +75 basis points of upside pressure to interest rates in the short term."

A global growth rate below 2.5% is generally considered recessionary.

The OECD recommended that central banks stay vigilant against inflation and keep expectations anchored, while governments ought to implement measures to cushion the impact of energy prices on households and businesses.

The OECD said, however, that the business sector has proven surprisingly resilient, that an agreement could be reached between the U.S. and Iran to settle commodity markets, and that broadening investment in AI could boost productivity gains and push growth rates higher.

-Jules Rimmer

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06-03-26 0839ET