The Organisation for Economic Cooperation and Development has warned that a prolonged war in the Middle East could lead to a global recession and sharply higher inflation. The OECD has forecast that global growth could slow sharply to 2.1 per cent in 2026 and 1.8 per cent in 2027 if energy disruption persists. Some economies could fall into outright recession, with Asian countries reliant on Middle East energy supplies expected to be hit hardest.
The global economic outlook is uncertain due to the ongoing war in the Middle East, with the Organisation for Economic Cooperation and Development warning that recession and sharply higher inflation are possible if the conflict drags on into next year.
In a baseline scenario, global growth is projected to slow from 3.4 per cent in 2025 to 2.8 per cent in 2026 before picking up to 3.1 per cent in 2027. However, if energy disruption persists, global growth could slow sharply to 2.1 per cent in 2026 and 1.8 per cent in 2027. Some economies could fall into outright recession, with Asian countries reliant on Middle East energy supplies expected to be hit hardest.
Higher energy prices could add 0.4 percentage points to global inflation in 2026 and 1.3 percentage points in 2027, likely prompting central banks to hike interest rates by 0.5 to 0.75 percentage points in the short term. In the baseline scenario, the OECD forecast that inflation across G20 economies would peak at 4 per cent this year before slowing to 3.1 per cent next year with interest rates largely on hold this year and cuts expected next year.
Global trade growth is set to moderate following a strong 2025, though robust demand for AI-related goods and investment, especially in Asia, should provide some support. In the baseline scenario, stronger energy exports are expected to support US growth, partly offsetting the drag from higher prices on household purchasing power. Growth is projected to ease from 2.1 per cent in 2025 to 2.0 per cent in 2026 and 1.8 per cent in 2027.
In Europe, eurozone growth was seen slowing from 1.4 per cent to 0.8 per cent this year before rising to 1.2 per cent next year as resilient labour markets and higher defence spending help offset government belt-tightening. In Britain, growth is projected to slow to 0.9 per cent this year before recovering to 1.1 per cent in 2027 as global trade stabilises and financial conditions ease.
In Asia, China was seen slowing from 5.0 per cent growth in 2025 to 4.5 per cent in 2026 and 4.3 per cent in 2027 with ample energy reserves limiting exposure to oil price spikes. Exports are set to benefit from lower U.S. tariffs and a competitive tech sector, although a property slump remains a drag.
Japan is expected to be among the hardest-hit by trade disruptions linked to the Gulf conflict, with growth slowing from 1.1 per cent in 2025 to 0.6 per cent in 2026 before edging up to 0.8 per cent in 2027, a downgrade from March. While subsidies will help cushion the energy shock, the OECD said Japan needs a clear and credible plan to rein in public finances over the medium term as interest rates rise
Global Recession Higher Inflation Middle East War OECD Forecast Energy Disruption
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