The global economy faces a sharply deteriorating outlook if the war in the Middle East drags on, with the risk of recession in several countries and a renewed surge in inflation, according to a warning issued by the Organisation for Economic Cooperation and Development (OECD).
In its latest assessment, the OECD said the duration of the conflict will be the decisive factor shaping global growth, energy prices, and monetary policy over the next two years. A short-lived disruption would allow Gulf oil and gas production to gradually recover from the third quarter, with supply shortages largely contained to Asia and eased by strategic reserves and alternative shipments.
Under that baseline scenario, global growth is expected to slow from 3.4% in 2025 to 2.8% in 2026 before recovering slightly to 3.1% in 2027, broadly consistent with previous forecasts. Inflation across G20 economies would peak at 4% this year before easing to 3.1% next year, while interest rates are expected to remain steady with potential cuts in 2026.
However, the OECD cautioned that a prolonged disruption extending into next year would significantly worsen conditions. In that downside scenario, global growth could fall to 2.1% in 2026 and 1.8% in 2027, levels typically associated with major global crises such as the 2008 financial crash or the Covid-19 pandemic. Inflation would also accelerate, with higher energy prices adding 0.4 percentage points in 2026 and 1.3 percentage points in 2027, forcing central banks to raise interest rates by up to 0.75 percentage points.
The report warned that some economies, particularly in Asia that depend heavily on Middle Eastern energy imports, could slip into recession if supply disruptions persist.
Growth prospects vary widely across major economies. In the United States, stronger energy exports are expected to partly offset weaker domestic demand, with growth easing gradually from 2.1% in 2025 to 1.8% in 2027. The eurozone is projected to slow to 0.8% this year before recovering modestly to 1.2% in 2027, supported by labour market resilience and increased defence spending.
In the United Kingdom, growth is forecast to dip to 0.9% in 2025 before rising to 1.1% in 2027 as global trade stabilises. China is expected to see a gradual slowdown from 5% growth in 2025 to 4.3% in 2027, with energy reserves cushioning the impact of oil price volatility, although property market weakness continues to weigh on momentum.
Japan faces one of the sharpest slowdowns, with growth forecast to fall from 1.1% in 2025 to 0.6% in 2026, before a modest rebound the following year. The OECD noted that while subsidies may soften the impact of rising energy costs, Japan will need a clearer plan to manage public finances as borrowing costs increase.
The OECD added that global trade will continue to expand, though at a slower pace, supported in part by strong demand for artificial intelligence-related goods and ongoing investment flows in Asia.
