OECD: Lowers 2026 global growth forecast to 2.8%; if the Iran war persists, rate cut expectations will be reversed.

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The global economic outlook is facing a critical test from the direction of the Middle East war. The Organization for Economic Cooperation and Development (OECD) warned on Wednesday that if the ongoing conflict in the Middle East drags on into next year, some economies face recession risks, global inflation could rise sharply, and central banks may be forced to resume interest rate hikes—fundamentally reversing market expectations for an easing cycle.

In the baseline scenario, the OECD downgraded its global growth forecast for 2026 to 2.8%, a significant slowdown from 3.4% in 2025, with a slight rebound to 3.1% in 2027, largely in line with the organization's March forecast. US growth forecasts likewise slow from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027. However, if energy disruptions persist through 2026 and 2027, global growth may plunge to 2.1% and 1.8%, near levels seen during the 2008 financial crisis and the COVID-19 pandemic.

In the extreme scenario, rising energy prices will push global inflation up by an additional 0.4 percentage points in 2026 and 1.3 percentage points in 2027, with central banks expected to raise rates by 50 to 75 basis points over the short term. This outlook stands in sharp contrast to the baseline scenario’s forecast for rate cuts next year, directly impacting bond markets and interest rate-sensitive assets.

Dual-track Scenarios: Duration of Conflict Determines Global Growth Fate

The OECD report outlines two divergent paths. If the conflict ends quickly, oil and gas production in the Gulf region is expected to gradually recover to pre-crisis levels from the third quarter onward, with supply shortages mainly focused in Asia and buffered by strategic reserves and other oil-producing countries.

In this baseline scenario, G20 economies’ inflation is expected to peak at 4% this year, then fall to 3.1% next year. Interest rates are largely unchanged in 2024, with rate cuts likely next year. After robust global trade growth in 2025, a more moderate expansion is expected, but continued growth in demand and investment for AI-related goods—especially in Asia—will provide some support.

However, if the conflict continues to spread, the outlook changes dramatically. Some economies may fall into substantial recession, with Asian countries highly dependent on Middle Eastern energy most affected. The OECD notes this downside risk is the core variable influencing the global outlook.

Major Economies: Divergence Intensifies

Major economies show clear divergence in both scenarios. In the US, strong energy exports may partly offset the drag of higher prices on consumer purchasing power, causing growth to slow slightly but remain relatively resilient.

Eurozone growth faces significant downward pressure, expected to slow from 1.4% in 2024 to 0.8%, before rebounding to 1.2% next year—labor market resilience and increased defense spending will partly offset fiscal tightening. UK growth is expected to drop to 0.9% this year, then climb to 1.1% in 2027 as global trade stabilizes and financial conditions improve.

Japan is identified as one of the economies hardest hit by trade disruptions, with growth plunging from 1.1% in 2025 to 0.6% in 2026, and only a slight rebound to 0.8% in 2027, further downgraded from the March forecast. The OECD notes that although subsidies can help buffer the energy shock, Japan still needs to formulate a "clear and credible" medium-term fiscal consolidation plan amid rising interest rates.

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