The global economic outlook hinges on how long the war in the Middle East lasts, with recession in some countries and sharply higher inflation a real possibility if it drags on into next year, the Organisation for Economic Co-operation and Development (OECD) warned on Wednesday.
If the conflict proves short-lived, Gulf oil and gas production could gradually return to pre-crisis levels from the third quarter with shortages confined to Asia and cushioned by strategic reserves and shipments from other producers.
In that baseline scenario, global growth is projected to slow from 3.4% in 2025 to 2.8% in 2026 before picking up to 3.1% in 2027, broadly in line with the OECD's March forecasts.
In its previous economic outlook, the group of 38 industrialized countries had forecast 2026 global growth of 2.9%.
"The longer the disruption lasts, the greater the economic, but also the social cost of this crisis, and it certainly will make policy changes much more difficult," OECD chief economist Stefano Scarpetta told a press conference.
If energy disruption persists well into next year, global growth could slow sharply to 2.1% in 2026 and 1.8% in 2027 – rates rarely seen outside major crises such as the 2008 to 2009 financial crash or the COVID-19 pandemic.
Some economies could fall into outright recession, with Asian countries reliant on Middle East energy supplies expected to be hit hardest.
In the protracted disruption scenario, 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 G-20 economies would peak at 4% this year before slowing to 3.1% next year with interest rates largely on hold this year and cuts expected next year.
"Around one-third of OECD economies are projected to experience negative real wage growth this year. Workers in these countries will see their living standards fall, which is the human reality behind the inflation numbers," OECD Secretary-General Mathias Cormann said.
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 U.S. growth, partly offsetting the drag from higher prices on household purchasing power. Growth is projected to ease from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027.
In Europe, eurozone growth was seen slowing from 1.4% to 0.8% this year before rising to 1.2% next year as resilient labor markets and higher defense spending help offset government belt-tightening.
In Britain, growth is projected to slow to 0.9% this year before recovering to 1.1% in 2027 as global trade stabilizes and financial conditions ease.
In Asia, China was seen slowing from 5.0% growth in 2025 to 4.5% in 2026 and 4.3% 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% in 2025 to 0.6% in 2026 before edging up to 0.8% 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.
The Paris-based organization also trimmed its 2026 growth forecast for Türkiye, citing weaker domestic demand amid high energy and commodity prices and tighter financial conditions, while leaving its 2027 outlook unchanged.
OECD cut its 2026 projection to 3.1% from 3.3% in March, and expects growth to rise to 3.8% in 2027.
"After some initial weakness in the first half of 2026, domestic demand is expected to pick up once the economic fallout from the Middle East conflict diminishes," it noted.
As a net importer of energy and fertilizers, Türkiye remains exposed to higher prices, which will continue to weigh on inflation and the current account, and in turn could trigger currency depreciation and boost imported inflation, it added.
The OECD stressed that bringing inflation down remains the policy priority and requires sustained tight macroeconomic settings.
"Achieving rapid disinflation will require continuously tight monetary policy," it said.
After easing earlier in the year, disinflation is expected to regain pace in the second half of 2026 and through 2027.
Consumer prices rose almost 4.2% month-over-month and nearly 32.4% on an annual basis in April, mainly driven by Iran war-linked pricing pressures.
According to OECD, headline inflation is projected to fall to 15% year-over-year by the end of 2027, supporting stronger private consumption and lifting growth.
Upside risks persist, including high energy prices and rising inflation expectations if policy action lags.
The OECD sees the interest rates likely remaining on hold amid high commodity prices, before decreasing to 20% by the end of next year.
At its last meeting, the Central Bank of the Republic of Türkiye (CBRT) held its benchmark one-week repo rate steady at 37%.
The bank said geopolitical risks and energy price volatility continued to pose uncertainty for inflation.
Separately on Wednesday, the European Bank for Reconstruction and Development (EBRD) cut its Türkiye growth forecast to 3.5% from 4% for 2026 and to 4% from 4.5% for 2027.
The EBRD cited rising energy imports, persistent inflationary pressures and Iran war spillover risks on tourism and manufacturing supply chains.
"Disinflation is costly and acts as a brake on the economy, but the cost of not addressing inflation would be much higher," EBRD chief economist Beata Javorcik said.
