OECD cuts 2026 global growth forecast and warns of recession risk if Iran war persists

 

The war in the Middle East has dented economic growth prospects worldwide, with a more severe shock likely if no effective ceasefire is agreed before 2027, the OECD warned Wednesday.

The OECD has downgraded its global growth outlook, warning that rising energy prices, geopolitical tensions and persistent inflation are weighing on the world economy and could push several countries into recession if disruptions continue.

In its quarterly update, the organisation, which represents 38 industrialised countries, forecasts global economic growth of 2.8% in 2026, down from its previous estimate of 2.9%.

However, if the conflict continues into 2027, global growth could slow to 2.1%, the OECD said. That would be well below the average annual growth rate of 3.4% recorded between 2013 and 2019, before the Covid-19 pandemic.

"The longer the disruptions last, the greater the economic and social costs will be," the OECD's chief economist, Stefano Scarpetta, said in the report.

He warned that many countries could face recession, while weaker investment spending — including in energy-intensive industries and artificial intelligence — would likely lead to higher unemployment.

Energy prices pose the biggest near-term risk

A central theme of the report is the sharp rise in commodity prices triggered by tensions in the Middle East.

The OECD highlights significant increases in several key commodities, including Asian natural gas (+80.8%) and European natural gas (+43.2%), as well as oil, fertiliser-related products and other commodities linked to hydrocarbon production in the Gulf.

These price rises threaten to weaken growth and fuel inflation across energy-importing economies. The impact is likely to be particularly severe in developing countries, where households spend a larger share of their income on energy and food.

Inflation is proving more persistent

Even if the conflict ends in the coming weeks, the OECD expects global inflation to rise to 4.0% this year, up from 3.4% in 2025.

Higher energy costs, rising industrial production costs, supply-chain disruptions and increasing fertiliser prices feeding through to food costs are all expected to put upward pressure on prices.

Major central banks face a difficult balancing act between supporting economic growth through lower interest rates and containing inflation through tighter monetary policy.

"Central banks are largely expected to keep monetary policy rates stable through 2026 as they balance the risk of inflation expectations becoming de-anchored with that of a sharper growth slowdown stemming from the conflict," the OECD said.

"In 2027, moderating energy prices are assumed to allow policy rate reductions in many countries, including the United Kingdom, Australia, Colombia, Hungary, Iceland, Türkiye, Brazil, Romania and South Africa," the organisation added.

Given the continued inflationary risks, the OECD cautioned against premature interest-rate cuts and stressed the importance of maintaining central-bank credibility.

Growth prospects for Europe remain vulnerable

The euro area is expected to see only modest growth, as it is among the regions most exposed to natural gas price shocks and rising industrial energy costs. The OECD forecasts eurozone GDP growth of 0.8% in 2026, down from 1.4% in 2025.

If the conflict is resolved in the coming months, however, the bloc could see a gradual recovery, with growth expected to reach 1.2% in 2027.

According to the OECD, the euro area is likely to benefit from a resilient labour market and increased defence spending. However, these factors will be partly offset in several economies by tighter fiscal policy and the gradual winding down of spending under the NextGenerationEU recovery programme.

In the United Kingdom, growth is expected to slow from 1.4% in 2025 to 0.9% in 2026, before recovering to 1.1% in 2027 as global trade and financial conditions improve.

In the United States, economic growth is forecast to ease to 2.0% in 2026, compared with 2.1% in 2025.

AI investment remains a rare source of economic strength

One of the few bright spots in the OECD's outlook is the continued strength of investment linked to artificial intelligence.

The organisation said spending on AI infrastructure helped support investment, production and trade before the conflict, helping to sustain momentum in the global economy despite mounting geopolitical and economic pressures.

The OECD said its forecasts were made against a backdrop of "solid underlying momentum" in the global economy, supported by strong AI-related investment and favourable financial conditions.

It added that businesses have shown a notable ability to adapt to economic shocks in recent years. This, combined with "increasing visibility of the possible productivity gains from AI technologies could push growth higher, especially in 2027," the report said.

But the OECD also warned that a prolonged disruption to energy supplies could threaten the economic productivity AI is expected to deliver. AI infrastructure, including data centres, depends heavily on reliable energy supplies, while key technologies such as semiconductors rely on specialised inputs sourced from Gulf economies.

The report also suggested AI could provide a bigger boost to growth than currently expected. While the United States has led the surge in AI-related capital spending so far, other major economies could increasingly benefit as adoption becomes more widespread and investment accelerates.

The OECD said the scale and timing of productivity gains from AI remain uncertain, but added that the benefits could become more visible over the next two years than is currently anticipated.

Source: Euronews