Iran war erases global growth upgrade, fans inflation: OECD

[PARIS] The escalating conflict in the Middle East has knocked the global economy off a stronger growth path, the Organisation for Economic Cooperation and Development (OECD) warned on Thursday (Mar 26), as a near-halt in energy shipments through the Strait of Hormuz threatens to push inflation sharply higher.

The Paris-based OECD said the global economy had been on course for stronger-than-expected growth before the war in Iran erupted, but that prospect has now all but disappeared.

Global GDP growth is now projected to ease from 3.3 per cent last year to 2.9 per cent in 2026 before edging up to 3 per cent in 2027, as an energy price surge and the unpredictable nature of the conflict offset tailwinds from strong technology-related investment, lower effective tariff rates and momentum carried over from 2025.

“There’s a high level of uncertainty around the duration and the magnitude of the current conflict in the Middle East and that means that this outlook is subject to significant downside risks that could result in lower growth and higher inflation,” OECD chief Mathias Cormann told journalists.

Adverse scenario

The projections in its interim Economic Outlook are conditional on a technical assumption that energy market disruption moderates over time, with oil, gas and fertiliser prices declining gradually from mid-2026 onwards.

The 2026 projection is unchanged from the OECD’s December forecast, but preliminary indications since then had suggested global GDP growth could have been upwardly revised by around 0.3 percentage points in 2026 had the conflict not escalated – a revision that has been entirely erased by the impact of the fighting.

With energy prices now soaring, G20 inflation is projected to be 1.2 percentage points higher than previously expected in 2026 at 4 per cent, before easing to 2.7 per cent in 2027.

In an adverse scenario where energy prices peak higher and stay elevated longer, global growth would be 0.5 percentage points lower by the second year of the shock and inflation would be 0.9 percentage points higher, the OECD said.

US outlook

The war compounds an already complex picture on trade.

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US bilateral tariff rates have declined following the US Supreme Court ruling against tariffs imposed under the International Emergency Economic Powers Act, with particularly large reductions for several emerging market economies including Brazil, China and India. Nonetheless, the overall US effective tariff rate remains well above that prevailing prior to 2025.

On individual economies, annual GDP growth in the US is projected to moderate from 2 per cent in 2026 to 1.7 per cent in 2027, as strong AI-related investment is gradually offset by a slowdown in real income growth and consumer spending. The OECD had pencilled in a forecast of 1.7 per cent this year and 1.9 per cent for 2027 in December, before the Supreme Court ruling.

US headline inflation is now forecast to hit 4.2 per cent in 2026, up 1.2 percentage points from the previous projection.

Diverging paths

In China, growth is projected to ease to 4.4 per cent in 2026 and 4.3 per cent in 2027, both in line with the OECD’s previous forecasts.

Euro area GDP growth is anticipated to slip to 0.8 per cent in 2026, as higher energy prices weigh on activity, before increasing to 1.2 per cent in 2027 helped by stronger defence spending. That marked a sizeable downgrade from December when the OECD had forecast 1.2 per cent growth in 2026 and 1.4 per cent in 2027.

In Japan, growth is projected at 0.9 per cent in both 2026 and 2027 – both unchanged, as the rising cost of energy imports offsets robust business investment.

The OECD urged central banks to remain vigilant and called on governments to ensure any support measures for households were well-targeted and time-limited. REUTERS