The conflict in the Middle East has become the dominant force shaping the global economic outlook. The world economy entered 2026 stronger than many had anticipated. Activity demonstrated considerable resilience sustained by strong investment in artificial intelligence, supportive financial conditions and easing trade tensions. Global growth prospects appeared poised for a significant upward revision.
Yet the global economy is now again under pressure. Disruptions to shipments through the Strait of Hormuz, together with damage to energy infrastructure, have triggered a sharp rise in energy prices and increased the cost of fertilisers and other critical industrial inputs. Higher costs are feeding into inflation pressures, weakening confidence, and weighing on household demand and business activity.
The evolution of the Middle East conflict remains uncertain, but its economic consequences are likely to be felt for some time even after its resolution. The range of possible outcomes is wide. Recognising this uncertainty, we framed our global projections through a scenario-based approach. Rather than relying on a single forecast path, the analysis considers two possible trajectories: a time-limited disruption scenario in which disruptions remain relatively short-lived, and a prolonged disruption scenario, with broader, much more long-lasting negative consequences.
At the time of finalising this Economic Outlook, the prospects of a peace deal seemed to gain some momentum. A durable settlement to the current conflict would not only bring relief to the people of the region but also lay the groundwork for a resolution to the disruptions it has caused to the global economy. Assuming that energy prices gradually ease from mid-2026 onward, broadly in line with current futures market expectations, we project global economic growth to slow from 3.4% in 2025 to 2.8% in 2026 before recovering to 3.1% in 2027. Annual consumer price inflation in the G20 countries is expected to rise to 4.0% in 2026 from 3.4% in 2025, before easing to 3.1% in 2027 as energy and food price pressures gradually fade.
However, the longer the disruptions last, the larger the economic and social costs become. Should the disruptions persist well into 2027, global growth is expected to slow significantly, to just 2.1% in 2026 and 1.8% in 2027, potentially pushing some economies into or close to recession. Unemployment would rise and investment – including in energy-intensive AI – would weaken significantly, with increasing risks of financial market repricing. Global inflation would rise by 0.4 percentage points in 2026 and 1.3 percentage points in 2027, with upside pressures from elevated commodity prices partially offset by weaker final demand. The consequences would be global but could prove especially severe for developing economies with limited energy reserves, higher shares of energy and food in household consumption, constrained fiscal capacity and weak social safety nets, low private savings buffers and more fragile currencies.
Policymakers face difficult decisions. Central banks can look through the supply-driven rise in prices as long as inflation expectations remain well anchored and second-round effects are contained. However, a policy response may become necessary if price pressures broaden, or if growth weakens significantly.
Many governments have moved quickly to provide relief to households and firms from the high global energy prices – largely through broad-based measures, as documented in the OECD Energy Support Measures Tracker and Chapter 2. Measures such as tax reductions and price caps, tend to weaken incentives to reduce energy use – particularly undesirable during an energy supply crunch. They can also prove costly. Fiscal space is limited due to elevated public debt and further pressures to come from ageing, defence spending – as discussed in Chapter 3 – and the increasing frequency of extreme weather events. In this context, relief measures should be increasingly targeted to contain fiscal costs – particularly if the disruption is prolonged. Finally, support measures should include automatic sunset clauses to ensure they are phased out once conditions normalise.
If growth were to weaken substantially, as in the prolonged disruption scenario, the burden to cushion activity would fall mostly on fiscal policy, given the limited room for monetary policy to act. At the same time, policy choices would need to be carefully calibrated to avoid exacerbating strains in energy markets, adding to inflationary pressures, and undermining fiscal sustainability.
Finally, the vulnerability of our economies to one single chokepoint demonstrates the need for intensifying efforts to strengthen the resilience of supply chains - in this case, particularly to diversify energy supply - and to improve energy efficiency. In the near-term, emergency demand-restraint measures and international coordination of strategic energy stocks can help mitigate some of the effects of the supply crunch, but the need to invest more to wean us off the dependency on fossil fuel imports is more urgent than ever.
3 June 2026
Stefano Scarpetta
Chief Economist