23. The evolution of the conflict in the Middle East is highly uncertain and poses considerable risks to the baseline projections. The expected decline in energy prices in futures markets, which is used for the projections, represents a view that the current disruptions are expected to start easing over time, and be limited in 2027. Longer-lasting closure of oil and gas production facilities in the region with damage to critical infrastructure or persisting disruptions to exports through the Strait of Hormuz would be likely to have more significant adverse consequences than currently priced into world markets. Potential supply disruptions could be exacerbated by the current relatively low level of European gas reserves and the difficulties in exporting the vast majority of the world’s spare crude oil production capacity, which is primarily in Saudi Arabia. In addition to a further spike in prices, energy shortages could weigh on production activity in some economies, especially net energy importers. Net energy imports typically account for over 80% of domestic energy use in some Asian countries that are also highly reliant on energy imports from the Middle East, including Japan and Korea.
24. Further disruptions to trade in the Persian Gulf could also have negative effects on a broader range of products in global supply chains. For example, ongoing constraints to fertiliser supply could increase global food prices, with potentially serious impacts on household finances and inflation expectations. Furthermore, reduced supply of sulphur, helium or aluminium could impede production in a range of industries. On the upside, an earlier-than-expected de-escalation of hostilities could see commodity spot prices fall back sharply, limiting the drag on global growth and resulting in early declines in headline inflation.
25. Illustrative scenarios using the NiGEM global macroeconomic model highlight the potential sensitivities of growth and inflation to two of the many possible energy price paths over the next year.
A downside scenario considers the impact of an unexpected sharp increase in energy prices from their assumed level in the baseline projections, with oil prices averaging USD 135 p/b in the second quarter of 2026 and TTF prices EUR 77 MW/h. Thereafter they are assumed to decline, but remain significantly above the baseline price trajectory. Relative to the baseline projections, oil and gas prices are 26% and 17% higher on average in the first year of the shock, and around 15% higher in the second year. Global financial conditions are also assumed to tighten in this scenario due to risk repricing in the aftermath of the shock, with higher investment risk premia adding to model-based equity price declines. The latter shock weakens private sector demand, which moderates some of the upward pressures on prices from higher energy prices.
An alternative upside scenario explores the implications of a quicker-than-anticipated end to the current conflict in the Middle East, with energy prices returning towards their pre-conflict levels within a few months. This implies that oil and gas prices are around 20% lower than in the baseline on average in the first year of the shock.
Global fertiliser prices are assumed to move in line with the shocks to gas prices in both scenarios.
26. In the downside scenario, global output declines by around 0.5% by the second year of the shock (Figure 11, Panel A), with weaker real incomes and tighter financial conditions hitting consumer spending and investment. Many Asia-Pacific economies are particularly affected, reflecting the importance of imported energy for many of them. The advanced economies are also relatively hard-hit by the financial shock, in part due to their greater sensitivity to financial conditions. The output effects are relatively contained in the non-OECD economies, but this reflects a balance of different factors, with energy-importing economies hit significantly, but an improvement in the terms of trade boosting output in many energy-exporting economies. Global consumer prices rise by around 0.9% by the second year of the shock (Figure 11, Panel B), with the largest effects in emerging-market and developing economies. This reflects the higher energy intensity of these countries along with their greater sensitivity to higher food prices as higher fertiliser costs feed through. In the near-term policy interest rates rise initially by between 25‑50 basis points in many economies to help ensure that inflation expectations remain anchored, with private short-term inflation expectations relatively sensitive to changes in oil prices, but these increases are short‑lived as the downside effects on output intensify. The automatic budgetary stabilisers are allowed to cushion the impact of the shock, but no additional discretionary fiscal support is assumed to be provided to households to compensate for higher energy costs. Any such support would help to underpin household real incomes but would add further to the already rising debt burdens in many countries. This scenario does not incorporate any enforced reductions in energy use for businesses due to severe energy shortages. If such shortages were to arise, the downside effects on growth would be larger in the near‑term.
