OECD Cuts Growth Outlook as Middle East War Roils Economy

Energy Shock Derails Stronger Growth Path

The Organisation for Economic Co-operation and Development warned on March 26 that the escalating conflict in the Middle East is "testing the resilience of the global economy," as it released an Interim Economic Outlook projecting world GDP growth of just 2.9% in 2026 — unchanged from its December forecast but far below the upgrade that had seemed within reach before hostilities intensified.

According to the Paris-based institution, preliminary data had pointed to a potential upward revision of roughly 0.3 percentage points for 2026. That prospect has now evaporated. Crude oil prices have surged more than 50% since the onset of the conflict, driven by curtailed shipments through the Strait of Hormuz and damage to critical energy infrastructure.

Inflation Returns With a Vengeance

The energy price spike is feeding directly into consumer costs. The OECD now expects headline inflation across G20 advanced economies to reach 4.0% in 2026 — a full 1.2 percentage points above its previous projection — before easing to 2.7% in 2027 as energy pressures subside. In the eurozone specifically, the inflation forecast was raised by 0.7 points to 2.6%.

OECD Secretary-General Mathias Cormann urged governments to keep any energy-relief measures "targeted towards those most in need, temporary, and designed to preserve incentives to save energy." He also called for accelerating renewable energy generation and energy efficiency to strengthen long-term resilience against future price shocks.

Europe Hit Hardest, US Buoyed by AI

The regional picture is starkly uneven. The eurozone growth forecast was slashed by 0.4 percentage points to 0.8% in 2026, with Germany and France both downgraded to 0.8%. Higher energy costs are the primary drag, though rising defence spending offers a partial cushion — one the OECD expects to support a rebound to 1.2% in 2027.

The United States, by contrast, received a modest upgrade. Its 2026 forecast was lifted by 0.3 points to 2.0%, buoyed by robust investment in artificial intelligence and technology. However, the OECD cautioned that slowing real income growth and weaker consumer spending will pull US growth down to 1.7% in 2027.

China's economy is still projected to expand by 4.4% this year, easing to 4.3% in 2027, as Beijing continues to manage a gradual deceleration.

The Biggest Risk: Unpredictability

The OECD stressed that the evolution of the Middle East conflict remains "highly uncertain" and represents the dominant downside risk to the outlook. A prolonged disruption that keeps energy prices elevated beyond mid-2026 would further erode growth and delay the return of inflation to central bank targets.

Government budgets, already strained by high debt levels, face mounting pressure from defence spending, ageing populations, and climate-related costs. The report underscored that policymakers have far less fiscal room to absorb shocks than they did during the pandemic.

For now, the global economy is holding together — but only just. As Cormann summarized: growth will remain robust, but it will be "slower than the pre-conflict trajectory, with significantly higher inflation." Whether that trajectory worsens depends on events that no forecaster can predict.