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Failure to resolve the energy crisis in the Middle East would plunge the world into a “dark scenario” of tumbling growth and sharply higher interest rates, the OECD has warned.
The Paris-based organisation said a “prolonged disruption” to energy flows that lasts into the second half of 2027 would cut global growth to 2.1 per cent this year and just 1.8 per cent next year.
Such rates are “extremely low outside of major global recessions such as the global financial crisis or the pandemic”, the OECD warned, adding that major central banks such as the US Federal Reserve would need to respond by lifting interest rates at least a half-point to curtail inflation risks.
Efforts to move beyond the fragile truce between Washington and Tehran have faltered in recent days as Iran attacked a US military base in Kuwait in response to American strikes against military targets in southern Iran. This has damped hopes that a deal may be close to reopen the Strait of Hormuz to more ships.
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In its latest global outlook, the OECD’s central scenario assumes that the crisis can nevertheless be resolved soon. If energy prices follow current levels on the futures market, global growth will decline this year to 2.8 per cent from 3.4 per cent in 2025. It will rise to 3.1 per cent in 2027, the OECD said.
Under this central scenario, US growth will slow to 2 per cent this year from 2.1 per cent in 2025. US inflation will hit 3.7 per cent this year, far above the Fed’s 2 per cent target, but less than the 4.2 per cent the OECD had forecast in March.
Among G7 countries, the UK will have the joint highest inflation rate this year alongside the US, with price growth of 3.7 per cent.
The OECD has modestly revised up its forecast for UK GDP growth this year to 0.9 per cent from a previous forecast in March of 0.7 per cent. Output will go on to expand by 1.1 per cent in 2027.
Under the central scenario, major central banks including the Fed and the Bank of England can keep rates unchanged despite the near-term surge in inflation, said the OECD.
But failing to secure a peace agreement until well into 2027 would do lasting damage to the global economy, it warned.
Stefano Scarpetta, the OECD’s chief economist, said: “I hope we are not already into the prolonged disruptions scenario, because this is a very dark scenario.”
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Under this outlook, energy prices would be 50 per cent higher than levels currently implied by futures markets. There would be “substantial shortages” of energy products and agricultural and industrial inputs produced by the Gulf economies.
This would result in “scarring effects on potential output”, with knock-on effects for financial markets and confidence, the OECD said.
It could also damage AI investment because of the sector’s high energy demands and given the importance of commodities from the Gulf in industries such as semiconductors.
Major central banks would need to lift interest rates by between 0.5 and 0.75 percentage points to prevent so-called second-round effects from the energy price surge diffusing into the wider economy.
Pressures on governments’ finances would increase, the OECD added, especially in weaker economies. Higher interest rates would limit the space available for governments to introduce “discretionary measures to help stabilise activity”.
Data visualisation by Steven Bernard
