OECD Economic Outlook, Volume 2026 Issue 1

1. General assessment of the macroeconomic situation

Introduction

The evolving conflict in the Middle East is having significant humanitarian costs and testing the resilience of the global economy. The duration and extent of the conflict remain uncertain, though at the time of finalising the Outlook there are some encouraging signs of a negotiated settlement. Even after the conflict ends, the economic effects are likely to be felt for some time given the months it will take to restore damaged infrastructure and transport routes and deliver products around the world. Energy prices and the prices of other key agricultural and industrial inputs produced in the Persian Gulf economies have soared since February as production and exports have been curtailed, with the likelihood of shortages and actions to reduce energy usage becoming more pronounced in all countries the longer the conflict persists. Headline inflation has been pushed up in many economies, hitting the real incomes of households. Consumer and business confidence have eased and some signs of supply shortfalls have emerged. Many Asian economies are the most directly exposed to these shocks given their reliance on imports from the Middle East but the impact will be felt everywhere given interlinkages in global supply chains and integrated global energy markets. The heaviest burden is likely to fall on commodity-importing developing economies, as they are least able to attract scarce supplies or cushion households and firms against the shocks, and on the Gulf economies themselves.

Given the exceptionally uncertain situation and the extent to which economic prospects depend on achieving a durable resolution to the conflict, this Economic Outlook presents two different scenarios of how the global economy might evolve over the next eighteen months. These are largely shaped by the evolution of the energy crisis, the time taken to achieve a lasting settlement to the conflict and the resulting policy responses, and highlight the range of possible outcomes that might occur. Both scenarios occur against a background of an otherwise solid underlying momentum in the global economy, with output boosted by strong AI-related investment, production and trade, and supportive financial and fiscal conditions. Lower US effective tariff rates on imports than originally announced have also reduced headwinds to growth.

A projections-based scenario is one in which the disruptions from the conflict are sizeable but limited to a relatively short period of time, hereafter referred to as the “time-limited disruption” scenario. Energy prices are assumed to decline gradually over time in line with futures prices, amidst progress towards a negotiated and durable peace agreement. Energy production and trade in the Gulf economies gradually return to pre-conflict levels from the third quarter of 2026 onwards in this scenario. There may be some limited energy shortages in some economies, especially in Asia, but the use of strategic reserves, oil in transit or stored on tankers, and some modest additional supply from non-Gulf producers helps to cushion the shock. Global GDP growth is projected to slow from 3.4% in 2025 to 2.8% in 2026 before picking up to 3.1% in 2027. Policy interest rates are expected to remain broadly stable this year in most major economies with underlying price pressures generally projected to remain contained, before easing slightly in 2027. The fiscal stance is anticipated to be broadly neutral in the majority of countries in the near-term, with planned consolidation measures often being offset by additional expenditure to cushion the impact of energy price shocks on households and companies. 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 price pressures fade and food price pressures peak. Core inflation is expected to return close to target in many economies by the end of 2027. If a lasting settlement is attained, with larger declines in energy prices than implied by futures prices in late May, then global growth is likely to be marginally higher and inflationary pressures lower. For instance, an additional decline of 10% in oil and gas prices and fertiliser costs from the latter half of 2026 would raise global GDP growth by an additional 0.1 percentage point in 2027 and reduce global inflation by 0.3 percentage points.

A model-based analysis, hereafter referred to as the “prolonged disruption” scenario, highlights the potential costs of failing to secure a peace agreement until well into 2027. The current disruptions to energy production and exports in the Gulf economies are assumed to persist until the latter half of 2027, before gradually fading thereafter. In this scenario, the likelihood of substantial shortages of energy products and agricultural and industrial inputs produced by the Gulf economies is high, resulting in scarring effects on potential output via lower efficiency and foregone investment. Global energy and fertiliser prices are significantly higher for an extended period relative to the time-limited disruption scenario, financial conditions are considerably tighter and household and business confidence substantially weaker. Global growth is expected to slow significantly, to just 2.1% in 2026 and 1.8% in 2027, pushing several economies into or close to recession, and raising unemployment. Global inflation is raised, by an additional 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. Many Asian economies would be hard hit in this scenario, reflecting their heavy exposure to energy supplies from the Middle East. Policy interest rates would be likely to rise from current levels in 2026, by between 50‑75 basis points in most countries to help moderate inflation pressures, with these increases being removed gradually in 2027 as downward pressure on growth intensifies. Budgetary pressures are increased because of the weaker economy and higher interest costs on new debt issuance, potentially limiting the space available for discretionary measures to help stabilise activity.

There are many other factors that could affect the outlook under either scenario. Prolonged disruptions to the supply of energy and energy products could adversely affect AI investment due to the dependence of key infrastructure on energy availability and on products, such as semiconductors, that rely on specialised inputs from the Gulf economies. A further increase in national export restrictions for key products in short supply would add to policy uncertainty and intensify the impact of prolonged supply disruptions and energy shortages. There could also be more extensive risk repricing in financial markets than seen so far, adding significantly to the existing pressures on some highly leveraged non-bank financial institutions such as private credit and equity funds. Higher energy import costs could widen external deficits in commodity-importing emerging and developing economies, putting pressure on reserves and external financing conditions. On the upside, a continuation of the recent resilience and adaptability to shocks shown by the business sector, and increasing visibility of the possible productivity gains from AI technologies could push growth higher, especially in 2027. Further changes to US tariff levels could raise or lower trade, policy uncertainty and growth.

Given the high level of uncertainty, flexible and agile policies are needed to ensure macroeconomic stability. Polices also need to focus on medium-term challenges, including the need to establish a credible fiscal path to debt sustainability, enhance energy security, secure a lasting decline in trade tensions and strengthen the prospects for sustainable and resilient growth.

• Central banks need to remain vigilant and attentive to shifts in the balance of risks around economic and financial developments to ensure that underlying inflation pressures are durably contained. The current supply-induced rise in global energy prices can be looked through provided inflation expectations remain well-anchored, but policy adjustment will be needed if there are signs of broader price pressures, as in the prolonged disruption scenario, or signs of a significant growth moderation. Clear communication is needed to ensure that the factors behind finely balanced policy decisions are well understood. In the event of a significant tightening of global financial conditions, it could be necessary to enhance currency swap lines and reconsider the current plans of some central banks for a further reduction in sovereign bond holdings.

• Government measures to cushion the impact of higher energy prices should, be well‑targeted on households most in need and viable firms, while preserving incentives to reduce energy use and diversify energy sources. Such measures should also include clear sunset mechanisms as energy prices decline. Untargeted support and measures such as tax reductions and price caps are likely to have higher fiscal costs and weaken incentives to reduce energy use, delaying the necessary adjustment in energy demand. Such policies would be particularly costly should the impact of the conflict in the Middle East persist. If growth weakens substantially, as in the prolonged disruption scenario, fiscal policy will need to provide any necessary stimulus to cushion output given the limited scope for monetary policy to do so. The scope to act is likely to vary across countries according to their current budgetary position, with many emerging and developing countries particularly constrained. Careful policy choices will be needed to ensure that any stimulus measures do not magnify imbalances in energy markets or intensify inflationary pressures.

• The potential need for further stimulus in the prolonged disruption scenario highlights that stronger efforts to contain and reallocate spending, improve public sector efficiency and enhance revenues are required to ensure longer-term debt sustainability and maintain the ability to react to significant shocks. The pace and composition of such adjustments will depend on the specific circumstances and challenges in each economy over time but should seek to preserve and foster the growth potential on which debt reduction ultimately depends.

• Safeguarding financial stability requires robust supervision, progressing with robust regulatory policies for non-bank financial intermediaries (NBFIs) and crypto-assets in line with internationally agreed recommendations, and closing remaining data gaps on the many less regulated NBFIs. Enhanced stress-testing frameworks are also needed to better assess the risks around the increasing interconnectedness between banks and NBFIs, including scenarios that explore the potential effects of long-lasting disruptions in the Middle East and to marked changes in AI valuations.

• The vulnerability of economies to future energy supply shocks can be mitigated by efforts that improve the diversification of energy supply and promote energy efficiency, highlighting the importance of maintaining clear price signals in energy support measures. In the near-term, emergency demand‑restraint measures and international coordination of strategic energy stocks can help mitigate adverse supply disruptions.

• Constructive dialogue between countries is central to ensure a lasting resolution to trade tensions. Agreements to ease trade tensions and deepen trade relations would improve policy certainty, help ensure well-functioning and open global markets, and strengthen the prospects for investment, productivity and output growth. New export restrictions in response to supply disruptions should be avoided, as these only exacerbate global product shortages and push up prices.

• Enhanced reform efforts can improve the foundations and prospects for sustainable medium‑term growth and improve resilience. Actions to reduce regulatory burdens, strengthen skill development, and promote labour mobility and participation are especially important. Collectively, these improve the investment incentives and the capacity for workers and markets to adjust smoothly to structural changes in the mix of tasks and jobs over time, including those that result from new digital technologies.

Table ‎1.1. Global GDP growth is projected to moderate in the time-limited disruption scenario

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Recent developments

The persistent conflict is impeding global economic growth

The ongoing conflict in the Middle East has generated significant human costs for the countries directly involved and is buffeting the global economy, reflecting the interconnections of the affected economies with the rest of the world (Figure 1.1). Continuing disruptions to shipments through the Strait of Hormuz, along with damage to energy and other infrastructure, are crimping the global supply of key commodities. Global oil supply fell by 13½ per cent between February and April 2026, with oil production from the Gulf economies down by 45% in April (IEA, 2026a). Exports of LNG from the region have also halted, given the damage to key production facilities, notably in Qatar. Global gas supply is expected to be around 15% lower than previously anticipated as a result of the losses from the conflict (IEA, 2026b). There has also been curtailment of supply of many other industrial inputs that stem from the extraction of hydrocarbons, including fertilisers, helium, sulphur, and petrochemical compounds.

Prices of the affected commodities have ratcheted upwards, particularly in Asian markets given their comparatively heavy reliance on imports from the Gulf region. Competition to obtain scarce supplies has added to the upward pressures, especially for harder-to-obtain refined fuels and products for which the Gulf economies are major producers, pushing up spot market prices. Compared with 27 February, the price of crude, oil products, natural gas, sulphur and fertilisers, such as urea, have all risen sharply (Figure 1.2, Panel A). The supply of other commodities, including helium, which is used in the manufacture of industrial products such as semiconductors, has also been disrupted, though the price impacts are less visible because they are mostly traded on long-term contracts. Whilst some vessels have been able to exit the Strait given the ceasefire in place since April, traffic remains a fraction of pre-conflict levels (Figure 1.3, Panel A). Supply chains have reconfigured for oil exports from the Gulf and for delivery of goods into the region by other routes, albeit at a reduced rate. Congestion remains severe in ports such as Jeddah on the Red Sea and in Oman just east of the Strait of Hormuz, where goods are being offloaded to continue into the region on road or to cross the Strait in much smaller vessels. The conflict has also significantly curtailed air traffic, including in key aviation hubs Qatar and the United Arab Emirates, negatively impacting exports of business services and tourism. Gulf airspace has now been reopened but the number of commercial flights remains significantly lower than prior to the conflict (Figure 1.3, Panel B). Prior to the conflict, countries in the region accounted for around 15% of the global air freight and air passenger market.

Figure ‎1.1. The Persian Gulf countries have a significant role in the global economy

Gulf countries

Note: The Persian Gulf economies include Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates unless otherwise specified. In Panel A, investment data covers Bahrain, Kuwait, Oman, and Saudi Arabia. In Panel B, data is based on global production, with the exception of urea, which represents the share of international exports. Data for Iran is not included in oil or liquefied natural gas; sulphur production excludes Bahrain and Iraq; helium production is based on Qatar.

Source: OECD Balanced International Merchandise Trade Statistics (edition 2026 January); OECD Balanced Trade in Services database; International Air Transport Association; International Aluminium Institute; International Energy Agency; International Monetary Fund International Investment Position (IIP) database and World Economic Outlook) database; United States Geological Society; World Trade Organisation; and OECD calculations.

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Figure ‎1.2. A steep pick up in energy and other commodity prices is beginning to weigh on economic activity

Note: Panel A is based on data up to 27 May 2026. The series for urea is the New Orleans granular cost, including freight, in USD per metric tonne. In Panel B, the indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. The indices are then seasonally adjusted.

Source: LSEG; S&P Global; and OECD calculations.

Figure ‎1.3. Strait of Hormuz transits and commercial flights remain severely restricted, raising supply backlogs

Note: Panel A shows the average daily number of vessels exiting the Strait of Hormuz if travelling west to east; entering the Strait as east to west up to May 22, 2026. Panel B shows the number of daily commercial flights from 9 major international airports (Amman, Beirut, Doha, Dubai, Kuwait City, Muscat, Riyadh, Sharjah and Tel Aviv) up to May 26, 2026.

Source: Pilgrim, Dorville and Mourougane (2026); Flightradar24; and OECD calculations.

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To mitigate supply and production disruptions, inventories are being drawn down and all possible use is being made of available storage facilities in the Gulf economies. Preliminary data suggests that global oil stocks have declined significantly, falling by 129 million barrels in March and a further 117 million barrels in April, to be 7.9 billion barrels (IEA, 2026a). However, scope for inventory drawdowns is limited in some regions. Oil stock coverage is relatively low in some Asian countries that are heavily dependent on imports from the Middle East, such as India, the Philippines and Viet Nam (Figure 1.4, Panel A). There are problems developing for many petroleum products, with refineries in the Middle East affected by the conflict, and refineries in many Asian countries having minimal crude oil stocks. European natural gas storage levels were also already depleted at the onset of the conflict following the Northern Hemisphere heating season, increasing demand to replenish reserves (Figure 1.4, Panel B). Within the Gulf region itself, ample reserves have cushioned the immediate potential shock on food supply, given the region is almost entirely dependent on imports.

Figure ‎1.4. Oil and gas stock levels differ substantially across countries

Note: In Panel A, data correspond to February 2026 for IEA economies. Oil stocks include all petroleum (primary products and refined products), excluding naphtha and international marine bunkers. Refined products are converted to crude‑oil equivalent. Days of cover are calculated relative to net imports adjusted for stock changes. Further details on methodology are available in the IEA oil stock data documentation. The dashed line denotes the IEA 90‑day emergency stockholding requirement, which applies only to IEA member countries. IEA data refers to December 2025. For non‑IEA economies (shown with green bars), fuel‑reserve coverage is based on official government statements and briefings published in 2026 by national authorities. Panel B is based on data up to 26 May 2026. The shaded area is the range of the minimum and maximum EU average for each day over 2016-26. The “% full storage” measures the working gas volume available.

Source: International Energy Agency (IEA); AGSI; Bangladesh MPEMR/BSS; Government of India Press Information Bureau; Indonesia Cabinet Secretariat; Myanmar MOI; Pakistan parliamentary statements; Philippines DOE/PNA; Thailand PRD; Viet Nam MOIT; and OECD calculations.

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There are early signs in various countries of demand being pared back in response to the steep increase in prices or diminished inventories. For example, Asian petrochemical producers have curtailed operating rates due to scarce feedstock supply (IEA, 2026a) and commercial use of liquefied petroleum gas is being rationed in some emerging-market economies, including India, Viet Nam and the Philippines (OECD, 2026a). Tightening jet fuel markets and longer flight paths have also resulted in flight cancellations across the Middle East, Europe and Africa. Such constraints on activity will grow the longer the conflict persists, as inventories are further drawn down and supplies become more difficult and more costly to obtain on global spot markets. Despite weaker demand, supply disruptions led to an estimated 6 million barrel per day shortfall in the global oil market from March to the end of May (IEA, 2026a). Global market balance for all those commodities with supply impacted by the conflict will not be restored until the accumulated deficits that have built up are eroded through an extended period of supply flows exceeding demand.

Recent economic indicators have begun to reflect the impacts from the conflict. Measures of consumer confidence have declined sharply, including in Chile, Japan and Korea, as well as in many European countries such as Ireland, Italy, Luxembourg, Portugal and the United Kingdom. Business surveys since the escalation of the conflict have highlighted rising input price inflation in both manufacturing and services sectors (Figure 1.2, Panel B), and an increase in suppliers’ delivery times, especially in Europe. In April, the global supply chain pressure index of the Federal Reserve Bank of New York was almost two standard deviations above its long-term average. Businesses reported a weakening in output growth between February and April in the services sector, though output conditions in manufacturing sectors remained stable, coinciding with an increase in stock building of goods amid higher global uncertainty (Figure 1.2, Panel B). Preliminary flash PMI survey responses for May suggest a broad-based weakening in output growth in both services and manufacturing in many of the countries for which data are available.

New export orders in both services and manufacturing weakened in March and April in many countries, particularly emerging-market economies. This may reflect their greater reliance on critical imports from the Middle East (Box 1.1) and its role as a key destination for many exports from emerging-market economies (Figure 1.5). However, the negative impact is likely to broaden as the conflict persists. Preliminary May data suggests European goods exports may have weakened significantly. The softening of services export orders since the conflict may reflect the sensitivity of services such as tourism and logistics to higher transport costs, as well as reduced household spending on non-essential services. The weakness in services orders was especially steep in tourism (S&P, 2026a), with higher prices likely weighing on both domestic and international travel.

Freight rates have risen, particularly for goods travelling into or transiting through the Middle East, reflecting higher war risk insurance premia, and the costs of offloading cargo at unscheduled stops. Rising jet and ship fuel prices have contributed to global ocean freight rates rising about 45% above the levels just before the conflict, and global air freight rates rising almost 30% higher. Global bottlenecks may reflect land‑side congestion rather than generalised issues with sea routes, with ship congestion concentrated in ports around the Persian Gulf.

There are significant risks that disruptions could persist or even grow for some time, even if the Strait of Hormuz opens fully. Damages to energy production facilities will take time to repair, delaying recovery in production capacity, and ship movements through the Strait and deliveries to destination countries will take time to normalise. These will likely affect the supply of energy and, in particular, prices for refined products such as global jet fuel and diesel. Higher costs and supply shortages may limit air freight and passenger flights, and lower sailing speeds may raise delivery times.

Figure ‎1.5. The Persian Gulf is an important export destination for African and Asian economies

Nominal merchandise exports to Persian Gulf, 2024

Note: The Persian Gulf economies include Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

Source: OECD Balanced International Merchandise Trade Statistics (edition 2026 January); and OECD calculations.

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Box ‎1.1. Exports of critical materials from the Middle East

The Persian Gulf economies are globally important exporters of many key energy and industrial chemicals such as methanol, ammonia and sulphur. This box highlights the role of the Gulf economies in global exports, and the countries’ most directly vulnerable to supply disruptions from Gulf exports in selected products. The estimates of trade dependencies are derived from the OECD’s balanced international merchandise trade dataset for 2024.1

The Gulf’s abundance in energy exports – both petroleum and natural gas – has meant that it has also become a key source for global trade in products generated as by-products from oil and gas processing, including helium, where Qatar’s supply accounts for just over 35% of the world’s total exports. Collectively, the Gulf economies also provide just over half of global sulphur exports and a quarter of global naphtha exports (Figure 1.6).2 The region exports just over 20% of the world’s traded polyethylene and polypropylene chemical compounds, with polypropylene used for packaging, pipes, medical goods and car parts, and polyethylene used for packaging, bottles and electrical insulation. The Gulf economies also have a comparative advantage in the production of goods that benefit from cheap energy, particularly natural gas – including methanol, ammonia, urea, di- and mono-ammonium phosphate fertilisers, and smelting aluminium.3

Figure ‎1.6. Persian Gulf shares of world exports of key products

Per cent

Note: * Naptha and jet fuel are part of refined petroleum products. Rare gases exclude argon, and include helium, measured using HS280429; methanol - HS290511; polyethylene - HS3901; polypropylene - HS390210; aluminium - HS76; crude petroleum – HS2709; refined petroleum – HS2710; naphtha - HS271012; jet fuel and other types ‑ HS271019; natural gas, LPG – HS2711; anhydrous ammonia - HS: 281410; urea - HS310210; DAP - diammonium phosphate (HS:310530); MAP - monoammonium phosphate - HS310530; sulphur – HS2503. The data used are based on UN Comtrade data, and so trade from Iran may be undercounted.

Source: OECD Balanced International Merchandise Trade Statistics (edition 2026 January); and OECD calculations.

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The exposure of individual countries to risks from disrupted Persian Gulf supply varies considerably (Figure 1.7). For sulphur, methanol and rare gases, for which there are few substitutes, exports from the Gulf economies represent between 50-90% of total product imports in the major recipient economies. A similar pattern holds true for urea and ammonia. Concentration risk tends to be lower for petrochemical compounds, phosphate fertilisers and aluminium, with the top five export markets typically having 20‑40 per cent of imports provided by the Gulf economies. Nonetheless, supply chains reliant on these products could still be threatened due to the Gulf’s importance in the provision of upstream products such as naphtha, sulphur and ammonia for other global suppliers. The longer the crisis persists, the greater the chance that shortages begin to impact across a range of supply chains, as substitutes are not readily available for many products, and specialised equipment limits the ability of firms to quickly switch to alternatives.

Figure ‎1.7. Countries’ exposure to selected Persian Gulf products

Share of imports from Persian Gulf in total country imports of each product

Note: In the upper panels the bars show the share of imports from the Persian Gulf in total imports of the product in each country. These countries represent the 10 largest importers of Persian Gulf products in dollar terms, but are ordered by those most reliant on Persian Gulf imports. Panel E shows the average import shares that the Persian Gulf accounts for in the five and ten largest importers from the Persian Gulf in dollar terms. Dependence on Gulf imports is weighted by the dollar spending of each country’s imports from the Persian Gulf. Definitions for products as in Figure 1.6.

Source: OECD Balanced International Merchandise Trade Statistics (edition 2026 January); and OECD calculations.

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1. Trade data is used as a proxy for country vulnerability, as cross-country input-output tables, which would measure indirect exposures, are not sufficiently detailed.

2. Helium gas is captured under rock formations similar to natural gas, and mining natural gas allows helium to be released too (albeit in much smaller quantities). Naphtha is a range blend of hydrocarbons which are created when crude oil is distilled. It cannot be used as a fuel directly, and is instead processed into ethylene, propylene, butadiene and benzene. Sulphur is produced as a by-product from the refining of crude oil. It is typically converted into sulphuric acid for many industrial uses, but trade is dominated by the raw material.

3. Methanol is produced from natural gas and is used in the production of polyethylene and polypropylene; it is converted into formaldehyde to produce resins, adhesives and paints, it is used to produce biodiesel and is an energy source in methanol fuel cells. Ammonia is produced using hydrogen from natural gas; urea is produced with ammonia; diammonium phosphate and monoammonium phosphate are created using sulphur and ammonia.

Global economic conditions were relatively robust before the conflict

The conflict in the Middle East escalated at a time when the global economy was relatively robust. Annualised global growth was 3.1% in the fourth quarter of 2025 and continued to expand at a solid pace in many economies through much of the first quarter of 2026. Technology‑related investment has strengthened in several economies, most notably the United States, but also in Canada and several European economies including Lithuania, Sweden and Estonia. This has supported industrial production of technology-related products, especially in Asian economies. In China and Korea, strong GDP growth in the first quarter of 2026 was aided by a large increase in production and exports of semiconductor products. Stronger semiconductor exports also contributed to solid growth in Japan in the first quarter, along with resilient domestic demand. In the United Kingdom, first quarter GDP growth was also solid amid improved domestic demand growth. There were signs of softness elsewhere, including in the euro area, with strong first quarter growth in Germany, moderate growth in Italy a contraction in France. Output is also estimated to have declined in a few countries, including Chile, Israel, Malaysia, Mexico Saudi Arabia and Sweden.

Aggregate household balance sheets were generally in a strong position in the advanced economies when the conflict escalated. Saving buffers were high in most economies, with saving rates above the average in the 2015-19 period across Europe, Australia and Canada. The position of corporate balance sheets was more mixed across countries. The gross operating surplus as a share of GDP was well above the 2015‑19 average in some economies, including Canada and Norway, but markedly lower in others, such as Latvia, Lithuania and Poland.

Global trade momentum has also been solid. Trade volumes of goods and services are estimated to have risen by 5.0% in 2025, helped by a steady decline in trade policy uncertainty (Figure 1.8, Panel A) and strong AI-related trade (Figure 1.9, Panel A). China and many other Asian economies have seen particularly strong growth (Figure 1.8, Panel B), with export volumes rising by around 16% in Viet Nam in 2025 and by around 11 per cent in China, helped by higher tech-related spending as well as stronger import demand from emerging-market economies. Export growth from Korea and Japan also strengthened in the first quarter of 2026. By contrast, trade in cars was relatively weak at the end of 2025 (Figure 1.9, Panel A). Monthly data for 2026 from the CPB point to continued strong merchandise trade growth, especially in the advanced Asian economies, but a marked drag on overall merchandise trade in March due to a sharp export decline in Africa and the Middle East.

Figure ‎1.8. Reduced policy uncertainty has helped to boost trade

Note: Panel A – May data based on the difference between the 1- 26 May average to April 2026 average, applied to monthly index value. Panel B - export and import volumes, using 2021 weights. Trade in EM Asia includes China, with the slowdown in March likely due to timing of the Lunar New Year.

Source: Data downloaded from https://www.matteoiacoviello.com/tpu.htm; CPB; and OECD calculations.

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Figure ‎1.9. AI related trade has supported global growth, particularly in Asia

Note: Based on monthly merchandise trade statistics in nominal USD. Trade values are computed as the average of exports and imports, with the exception of USA in Panel B, which shows imports only. Panel A – trade for selected countries include G20 and dynamic Asian economies for which timely customs data are available until December 2025. These comprise Argentina, Australia, Brazil, Canada, China, European Union, Hong Kong (China), India, Indonesia, Japan, Korea, Malaysia, Mexico, the Philippines, Singapore, South Africa, Chinese Taipei, Thailand, Türkiye, United Kingdom, the United States and Viet Nam. This represents around three-quarters of global merchandise trade in 2024. Data for Viet Nam is based on partner country data for available G20 and listed dynamic Asian economies. AI-related goods are 104 products at the HS6 level defined in WTO (2025). Cars and car parts are 109 products at the HS6 level. Panel B - OECD Asia includes Japan and Korea. Other Asian emerging-market economies include Hong Kong (China), India, Indonesia, Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand, and Viet Nam.  

Source: Eurostat; ITC Trade Map; UN Comtrade; and OECD calculations.

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Changes to US trade policies since November have lowered the (ex-ante) effective tariff rate on US merchandise imports from 14% at the time of the December 2025 OECD Economic Outlook to an estimated 9.6% including all pronouncements in force up to 6 April 2026. Following the US Supreme Court ruling that the International Emergency Economic Powers Act (IEEPA) did not authorise the imposition of tariffs in February, the United States introduced a new 10 percentage point tariff on all countries. The increase applies to all imported goods other than products subject to separate sector-specific tariffs, products specifically exempted, and USMCA-compliant merchandise imports from Canada and Mexico. Sector-wide tariffs, implemented based on investigations by the US Office of the Trade Representative, remain in place, although a number of changes were announced in April.1 The resulting change in the effective tariffs applied by the United States varies markedly across economies, with sizeable reductions for Switzerland as well as several emerging‑market economies, including Brazil, China and India (Figure 1.10). These rates could change further in the coming months. The 10-percentage point tariff will expire in late July 2026, unless extended by Congress, and a new pharmaceutical tariff regime is set to be implemented in the United States, effective on 31 July 2026. The likely impact is uncertain but could be modest if there are extensive exemptions, with increases in bilateral tariffs only for a handful of economies with significant pharmaceuticals shares in exports, mostly in Europe.2

Figure ‎1.10. US import tariffs on most countries have fallen this year

Note: Estimated change in tariff rates based on applicable rates to products and countries at the time they became effective, weighted by country‑specific product shares of United States imports in 2024. Changes relative to December 2024 tariff levels. The mid-November 2025 estimates were published in the December 2025 OECD Economic Outlook, prior to the ratification of the framework agreement between the United States and Switzerland.

Source: US Census Bureau; the White House; US Federal Register; and OECD calculations.

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Labour market conditions have been broadly stable

Labour market conditions remained broadly stable prior to the conflict, with the OECD unemployment rate still at low levels by historical standards. Nonetheless, different worker cohorts had diverse experiences: employment and labour force participation rates were rising in the OECD as a whole for those aged 55‑64 but people in the 15-24 age group experienced a decline in the employment rate (Figure 1.11, Panel A). Job vacancies, a forward‑looking measure of labour demand, have continued to moderate in several economies, but the rate of easing has not yet risen since the escalation of conflict in the Middle East. There are also no signs of widespread labour displacement due to business adoption of AI technologies at the industry level. Measured job vacancies of the industries identified as being most exposed to AI have increased more than other sectors over the year to April 2026 in most economies with available data, with the United States being a notable exception (Figure 1.11, Panel B). Other recent OECD analysis does not find evidence of substitution of workers with AI tools either, with a lack of workers with digital skills emerging as a barrier to the adoption of AI technologies (OECD, 2026b).

Nominal wage growth remained relatively elevated across the OECD in the final quarter of 2025, growing by 4% in year-on-year terms (Figure 1.11, Panel C), but is likely to lag inflation increases as seen in 2022-23. The level of real wages remained below 2021 levels in several countries even before the renewed energy price increases this year, including in France, Australia, Italy, Japan and South Africa (Figure 1.11, Panel D). Monthly data in early 2026 suggest some moderation in nominal wage growth in Germany and the United States, but little change in the United Kingdom and Japan. Unit labour cost growth in the OECD eased in 2025 despite the solid wage gains, aided by a recovery in labour productivity growth in many economies (Figure 1.11, Panel C). Median labour productivity growth (output per person employed) across OECD economies rose from 0.3% in the first half of 2024 to 1.2% by the fourth quarter of 2025, a rate that was broadly in line with the average pace through 2010‑19.

Figure ‎1.11. Labour market conditions remain broadly stable with limited signs of AI-related displacement

Note: For Panel A, the aggregation is based on OECD countries except Costa Rica and Iceland due to missing data. Missing information for October 2025 for the United States were replaced by a linear interpolation between September and November 2025. In Panel B, AI-exposed sectors correspond to ‘Information technology’, ‘Finance & Insurance’, ‘Real estate and rental and leasing’, ‘Professional, scientific and technical services’ and ‘Management of companies and enterprises’; vacancies of “Public administration” are excluded. Panel D shows labour compensation per employee deflated by the private consumption deflator except for Brazil, where it corresponds to real labour income (usual earnings); ‘Latest’ corresponds to 2026Q1 for Brazil, Denmark, Germany, Japan, Spain and the United States and to 2025Q4 for other countries.

Source: OECD Economic Outlook 119 database; OECD Infra-Annual Labour Statistics database; CEIC; and OECD calculations.

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The energy price shock has pushed up inflation

There were already signs of headline inflation picking up in the first two months of 2026 in some countries, including Colombia, Greece, India, Mexico and the Philippines. The subsequent increase in global commodity prices and producer costs following the escalation of the conflict has generated a more widespread increase in consumer price inflation. Monthly headline inflation in March and April 2026 picked up notably in many economies, including the euro area, Chile, Peru and the United States. In some other countries, including Hungary, India, Korea and China, government support measures such as price caps and indirect tax reductions, along with relatively low food inflation, helped keep inflation contained.

Online retail prices provide another timely indicator of price pressures. Daily price indices derived from a large sample of retailers (including petrol price offers) show a steep and persistent rise in prices between 27 February and 26 April, with a similar trajectory to that observed in the early period of the inflation spike in 2022 following Russia’s invasion of Ukraine (Figure 1.12, Panel B). This pattern is apparent across both advanced and emerging-market economies (Figure 1.12, Panel C). So far, the daily price movements reflect the direct impact from the increase in energy prices, with little sign of increased food inflation so far due to the effect of higher energy and fertiliser prices on the costs of food producers. Despite easing somewhat over the past month, urea prices remain substantially higher than in late-February, though the spike in prices through March and April was less pronounced than in early 2022 in response to Russia’s war on Ukraine.

The impacts of higher inflation on households will vary across countries depending on the intensity of use of the affected energy goods. The share of energy in household consumption baskets ranges from over 13% in Latvia to around 5% in Norway (Figure 1.12, Panel D), though impacts will also be conditioned by differences in the share of fossil fuels in the energy mix across countries. Emerging-market economies are likely to be hard hit given they tend to have a higher share of energy in consumption baskets. Furthermore, within OECD countries, households in the lowest part of the income distribution will be most adversely impacted, owing to their typically higher consumption share of energy relative to higher income households.

Inflation expectations have risen in some economies following the spike in energy and other commodity prices. The risk of expectations becoming destabilised may be more pronounced given recent price pressures are concentrated in salient items for household consumption baskets, such as energy. Moreover, they closely follow a period of relatively high inflation in such items: even before the escalation of the conflict, prices of energy and food relative to other consumer items generally remained elevated compared to the pre-pandemic period (Figure 1.13, Panel A). Measures of household inflation expectations over the medium-term picked up in April in the euro area and United States. Market-based measures of medium‑term inflation expectations also rose sharply, especially in Brazil, the euro area and United Kingdom, though have eased somewhat in recent weeks (Figure 1.13, Panel B). Survey-based measures of medium‑term corporate inflation expectations have also moved higher in Japan, though they remained stable in Canada and the United Kingdom.

Figure ‎1.12. The energy price shock is beginning to feed through to consumer prices

Note: Panels B and C are based on data up 25 May 2026. The daily price indexes are derived from the methodology outlined by Cavallo and Rigabon (2016) and use web-scraping technologies to monitor and collect daily prices on millions of items sold by online retailers that also have a physical presence in 27 countries. Price changes are then weighted based on official CPI weights in each country and aggregated to a world index using Purchasing Power Parity weights. Sectors not observed directly (e.g. education, health, real estate) are proxied with related goods that have shown similar historical patterns or estimates based on past CPI data. Panel C is based on the daily price data with a base period of 1 January for each year. As an example of how to read this chart, the first orange bar in Panel C highlights that for advanced economies, fuel price inflation in 2026 over 1 January to 25 May was nearly 30% higher than average fuel price inflation over 1 January to 25 May across the years in the 2010‑2025 period.

Source: OECD Consumer Price database; State Street PriceStats; Eurostat; US Bureau of Economic Analysis; national sources; and OECD calculations.

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Figure ‎1.13. Inflation expectations have moved higher following the energy price shock

Note: In Panel A, the data refer to April 2026. Panel B is based on data up to 20 May 2026. Financial market-based inflation expectations are derived from two-year inflation swap zero coupon rates, except for Brazil, where the two-year breakeven inflation rate is used.

Source: OECD Consumer Price Indices database; Bloomberg; and OECD calculations.

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Financial conditions have become less accommodative

Financial conditions remain accommodative in both advanced and emerging-market economies, but have tightened since the onset of the conflict in the Middle East (Figure 1.14, Panel A). Amid higher volatility there has been considerable repricing, particularly of equities outside the US, major crypto-assets and precious metals. Sovereign and corporate bond yields have risen, particularly for lower‑rated borrowers, reflecting expectations of higher inflation and policy rates as well as more elevated risk premia. An appreciation of the US dollar has further tightened financial conditions in some emerging markets. Despite these changes, equity valuations generally remain elevated and bond spreads compressed relative to historical norms.

The escalation of the Middle East conflict initially resulted in a sharp decline in global equity markets (Figure 1.15, Panel A). US markets have subsequently recovered, largely driven by technology and energy stocks, but elsewhere the decline has proven more persistent than in recent geopolitical crisis episodes (Figure 1.15, Panel B). Despite an increase, equity risk premia remain low by historical standards, suggesting that valuations are still elevated. In some sectors, such as software, an adjustment in prices had already begun in late 2025, especially in the US software sector amid concerns about the impact of AI on the business models of existing companies. The equity prices of private credit and private equity companies have also declined due to their significant exposure to the software sector. Crypto-asset markets have also recorded substantial price declines, reflecting a broader shift away from higher‑risk assets. Since the end of October 2025, the total market value of crypto-assets has fallen by around 35%, although stablecoins have broadly maintained their market capitalisation. The price of gold – traditionally considered a safe haven asset – has been highly volatile since early 2026, with sharp falls in March driven by investor sales to raise liquidity and by expectations of interest rate increases. Nonetheless, prices remain high by historical standards, after very strong growth through 2025.

Figure ‎1.14. Financial conditions remain mildly accommodative but have tightened amidst higher market volatility

Note: In Panel A, the monthly Financial Conditions Indices (FCI) for advanced and emerging economies are computed as the medians of individual country standardised FCIs. National FCIs are standardised around a long-term average and obtained as the first principal component of a wide range of country-specific and global financial data series (15 country-specific indicators and 12 global indicators) including equities, interest rates, measures of volatility, sovereign spreads and exchange rates. Higher (lower) values of the FCI point to tighter (easier) financial conditions. Latest data points are as of April 2026. In Panel B, equity markets’ implied volatility as measured by the VIX, the VTSOXX and the Nikkei volatility indices can be interpreted as the market expectation of risk (30-day expected volatility) in US, European and Japanese markets respectively. The MOVE index is a yield curve weighted index of the normalised implied volatility on 1-month Treasury options which are weighted on the 2-, 5-, 10- and 30‑year contracts. Latest data points are as of 27 May 2026.

Source: FRED Bank of Saint Louis; LSEG; and OECD calculations.

Sovereign bond yields have risen across most advanced and emerging markets, with China an exception (Figure 1.16). In most countries, the increase has been more pronounced for shorter maturities. This mainly reflects the upward impact of rising energy prices on market‑based inflation expectations across many advanced and emerging market economies, in tandem with expectations of higher policy rates. China remains comparatively insulated helped by low pre‑conflict inflation and scope to cushion global energy supply shocks. There is also evidence of some limited risk repricing. In the euro area, sovereign spreads over German Bunds have widened but remain low by past standards. Spreads on USD‑denominated sovereign bonds have also increased moderately in emerging-market economies.

Corporate bond spreads have increased moderately, especially for lower-grade issuers and in emerging economies and Europe, but overall remain compressed. Corporate borrowing rose in the first quarter of 2026 for both higher and lower‑rated firms, and bank lending strengthened in the major advanced economies as lending and deposit rates broadly stabilised. Resilient macroeconomic fundamentals and investor confidence in productivity gains from AI have helped to maintain favourable market valuations and credit conditions, even as geopolitical tensions weighed on investor sentiment. Mortgage costs in the United States and European economies have increased markedly as the increase in sovereign bond yields feeds through into borrowing costs. Sizeable increases have occurred in the United Kingdom, with more moderate rises in Germany and the United States.3

Figure ‎1.15. Equity prices declined substantially following the escalation of the Middle East conflict

Note: Equity benchmarks used are: Nikkei 225 (Japan), S&P 500 (United States), MSCI Europe excluding the UK (Europe), FTSE All-Share (United Kingdom), and MSCI Emerging Markets (Emerging markets). The initial dates indicated for each episode attempt to capture any material pre-event impact and hence may differ from actual starting dates. In both panels, changes are always relative to the initial dates for each episode. In Panel B the latest data points are as of 22 May 2026.

Source: LSEG; and OECD calculations.

The US dollar has strengthened since the escalation of tensions in the Middle East, reversing the steady decline seen previously. The renewed appreciation of the US dollar, particularly for Asian emerging market economies, reflects its positive correlation with oil prices in recent years, helped by the United States becoming a net oil exporter, and continued market perception that it is a safe haven when a global shock occurs. This adds to domestic energy price pressures in many economies and tightens financial conditions in emerging markets by increasing external debt‑servicing burdens, raising import costs, and intensifying capital outflow pressures. Sustained inflows into major emerging‑market equity and bond funds through late 2025 and early 2026 have gradually given way to outflows (EPFR, 2026).

Figure ‎1.16. Sovereign bond yields have increased since the onset of the conflict in the Middle East

Note: Türkiye is shown on the right-hand scale, all other countries on the left-hand scale. This figure shows the difference between the average over the 10 days to 27 May 2026 and the value on 27 February 2026 using yields of domestic-currency sovereign bonds.

Source: LSEG; and OECD calculations.

Scenarios

The current conjuncture and the outlook are exceptionally uncertain. Growth prospects depend on many factors, including the degree of damage to energy infrastructure and timeline for its repair, the durability of any negotiated settlement, the time it takes for normal trade patterns and transportation routes with the Middle East to resume, the extent of downstream bottlenecks in global supply chains and whether there are further enforced output reductions in importing countries in response to input shortages. The downward pressure on global growth and upward pressure on inflation from each of these factors will become more pronounced the longer the conflict persists (Figure 1.17, Panel A). Given the high level of uncertainty, two scenarios for the global economy are presented, conditioned on distinctly different evolutions of the conflict:

• A “time-limited disruption scenario”, with energy production in the Gulf economies gradually recovering from late in the second quarter of 2026 with regular air and shipping routes fully operational from that point. This is based on a technical assumption that energy prices evolve in line with futures markets pricing for oil and gas as of 26 May, which have energy prices peaking in the second quarter of 2026 before declining steadily thereafter. Under this assumption, the Brent crude oil price peaks at an average quarterly value just under USD 102 per barrel, with the average annual value of USD 92 per barrel in 2026 and USD 80 per barrel in 2027. Gas prices follow a similar trajectory, with a peak in the second and third quarters of 2026 and a decline, especially in 2027. Food prices also follow available futures curve data, with overall food commodity prices peaking in the first half of 2027 before starting to moderate. Other commodity prices are assumed to remain at their levels in April. Some shortages of key products are incorporated in a few countries, but they are generally assumed to be limited and short lived. Economic prospects in this scenario are based on projections made for each country.

• A “prolonged disruption scenario”, with energy production in the Gulf economies remaining subdued up to the third quarter of 2027, and rising global supply shortages that cause disruptions to production in importing and exporting countries. Under this scenario, energy prices are assumed to be 50% higher over the period from the third quarter of 2026 to the third quarter of 2027. The price of fertilisers and other affected inputs into industrial processes, such as sulphur and helium, would also rise as supply is curtailed. In such a situation, a renewed tightening in financial conditions would be likely and household confidence would be likely to weaken further. Outcomes under this scenario are based on illustrative simulations with the NiGEM global macroeconomic model.

Figure ‎1.17. Global growth prospects depend heavily on the duration of the conflict

Source: OECD Economic Outlook 119 database; OECD Economic Outlook 118 database; and OECD calculations.

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Global growth will weaken in the time-limited disruption scenario

Under the time-limited disruption scenario, global GDP growth is projected to slow from 3.4% in 2025 to 2.8% in 2026, before picking up to 3.1% in 2027 (Figure 1.17, Panel A). Higher energy prices will reduce domestic demand growth through 2026, with the terms of trade deteriorating in energy-importing economies. The unpredictable evolution of the conflict and concern about possible shortages will also undermine confidence and raise uncertainty. Set against this, strong underlying momentum in many economies, with booming technology‑related investment and broadly supportive financial conditions and fiscal policies, should support near-term growth. Households are also expected to smooth consumption by modestly drawing down on their high saving buffers, and the reduction in effective tariff rates on imports to the United States will reduce headwinds to growth. The surprising strength of the global economy through the end of 2025 and early months of 2026 would have prompted an upward revision to projected global real GDP growth absent the escalation of conflict in the Middle East (Figure 1.17, Panel A).

Under this scenario, global growth is projected to soften considerably in the second quarter of 2026, before picking up gradually thereafter, with significant weakening in many Asian economies and an outright decline in output in many Gulf economies. The subsequent gradual recovery in the Gulf economies as production recovers is reflected in a rising contribution from the rest of the world to global growth in 2027. Central banks are largely expected to keep monetary policy rates stable through 2026 as they balance the risk of inflation expectations becoming de‑anchored with that of a sharper growth slowdown stemming from the conflict. In 2027, moderating energy prices are assumed to allow policy rate reductions in many countries, including the United Kingdom, Australia, Colombia, Hungary, Iceland, Türkiye, Brazil, Romania and South Africa. Fiscal policy is projected to be broadly neutral in the typical advanced economy in 2026, before some mild consolidation occurs in 2027. In contrast, fiscal policy is assumed to become more expansionary in 2026 in a few large economies, including Germany and Japan.

Real GDP growth in the United States and Canada will benefit from stronger energy‑sector exports, but this will be offset by the negative impact of higher energy prices on inflation and household purchasing power. In the United States, growth is projected to slow from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027, while Canada’s growth is expected to decline from 1.7% in 2025 to 1.2% in 2026 before rebounding to 1.7% in 2027 as domestic demand recovers. In Europe, growth in the euro area is projected to ease from 1.4% in 2025 to 0.8% in 2026, then pick up to 1.2% in 2027, with labour market resilience and the positive influence of defence spending initiatives partially offset in several economies by tighter fiscal policy and the fading of NextGenerationEU spending. In the United Kingdom, growth is expected to slow from 1.4% in 2025 to 0.9% in 2026, before recovering to 1.1% in 2027 as global trade and financial conditions improve. Fiscal support is expected to aid the recovery in advanced Asian economies, despite their direct exposure to the disrupted trade flows stemming from the conflict that cause a sharp slowdown in the second quarter of 2026. Japan’s growth is projected to dip from 1.1% in 2025 to 0.6% in 2026 and 0.8% in 2027, whereas growth in Korea is projected to strengthen from 1.0% in 2025 to 2.6% in 2026 and 1.9% in 2027, driven by a strong labour market and the robust semiconductor cycle.

In the emerging-market economies, China’s growth is projected to ease from 5.0% in 2025 to 4.5% in 2026 and 4.3% in 2027, as energy-related vulnerabilities and real estate sector adjustments weigh on activity despite mitigating factors such as the increasing share of renewables in the energy mix, adequate oil reserves and gasoline price caps. India’s growth is also expected to moderate from 7.6% in fiscal year 2025–26 to 6.3% in 2026–27 and 6.4% in 2027–28, reflecting the impact from the increase in energy prices and rationing initiatives. Indonesia is projected to see a more modest dip in growth, partly due to lower reliance on energy imports from the Middle East, with growth easing from 5.1% in 2025 to 4.7% in 2026, followed by a recovery to 5.0% in 2027. In Latin America, Mexico’s growth is projected to strengthen from 0.8% in 2025 and 2026 to 1.8% in 2027, supported by past policy rate reductions and resilient labour markets, while Brazil’s growth is expected to slow from 2.3% in 2025 to 1.6% in 2026 before rebounding to 2.1% in 2027 as inflation declines and lower interest rates support domestic demand growth.

Employment growth in the OECD economies is expected to be relatively subdued in 2026 before edging up in 2027 as economic growth recovers in the time-limited disruption scenario. Annual employment growth in the median OECD country is projected to be 0.4% in 2026 and 0.5% in 2027. Labour force growth is projected to further ease, with populations ageing and migration inflows moderating in some economies. Nonetheless, the median unemployment rate across OECD economies is projected to rise slightly from 5.5% in 2025 to 5.7% in 2027. Nominal wage growth is expected to continue to decline in a majority of OECD economies as labour markets further loosen. The spike in headline inflation this year will cause real wages to weaken markedly, with around one-third of OECD economies projected to have negative real wage growth. Nonetheless, real wage gains are projected to gain pace in 2027, as the energy shock passes and stronger labour productivity growth helps reduce inflationary pressures.

Headline inflation is projected to rise in 2026 in many economies in this scenario, reflecting the recent increase in energy and other commodity prices (Figure 1.17, Panel B and Figure 1.18). While inflation pressures are generally projected to abate in 2027 as energy prices decline, this will be partly offset by the slight increase in food price inflation, as the lagged impact of higher energy and fertiliser prices on food commodity prices becomes more apparent. In the United States, inflation is expected to remain elevated in the near-term, reflecting the energy shock and the continued lagged impact from past tariff rate increases. However, inflation is projected to moderate as energy prices ease and tariff impacts fade. In Japan, the near‑term rise in inflation will be restrained by the cap on gasoline prices and additional subsidies on electricity and gas, with inflation projected to move back to the 2% target in 2027. Following a rise in headline inflation through the first three quarters of 2026, euro area inflation is also projected to move back to target, with unit labour cost growth projected to moderate further in 2027. Similarly, emerging-market economies are projected to experience a spike in inflation that fades over time. In India, the fading deflationary impact of past food and energy price-reducing shocks will be exacerbated by the surge in energy prices and recent currency depreciation. Inflation in China is expected to rise to between 1½-2 per cent in 2026-27 as higher energy prices are accompanied by the planned reduction in spare industrial capacity. Further disinflation in Argentina and Türkiye is expected, due to continued excess capacity, despite the headwinds from energy and fertiliser costs. Inflation is also anticipated to moderate in 2027 in several other emerging-market economies, including Brazil, Indonesia, Mexico and South Africa.

Figure ‎1.18. Headline inflation is projected to rise in many economies this year

Headline inflation

Note: Argentina and Türkiye are shown on the right-hand scale, all other countries on the left-hand scale. Data refer to the personal consumption expenditure price index for the United States, harmonised index of consumer prices for the euro area aggregate, euro area member states and the United Kingdom, and national consumer price indices for all other countries. India projections are based on fiscal years, starting in April. OECD is computed as the median of member countries.

Source: OECD Economic Outlook 119 database; and OECD calculations.

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Global trade growth is projected to moderate from 5.0% in 2025 to 3.1% in 2026, and slow further to 2.9% in 2027 (Figure 1.19, Panel A). In 2026, export volumes in China and the dynamic Asian economies are expected to grow by over 6.5%, amongst the fastest rates globally. Aggregate trade growth is projected to slow in the second and third quarters of this year, reflecting a sharp decline in trade with the Gulf economies, and increasing energy and transport costs. Set against this, strong momentum at the turn of the year, lower tariff rates on imports into the United States and strong AI-related trade should help to sustain overall global growth. In Europe, higher energy prices and limited AI-related exports are expected to lower trade growth in 2026 to less than half the rate in 2025, before a recovery in 2027. In the United States, overall trade growth is boosted over time by lower tariffs and reduced trade policy uncertainty. By 2027, a gradual moderation of trade growth in Asia is projected to bring overall world trade growth close to the rate of world GDP growth (Figure 1.19, Panel B).

Figure ‎1.19. Global trade growth is projected to moderate

Note: ‘OECD Europe’ includes the OECD members of the European Union, Iceland, Switzerland, Türkiye and the United Kingdom. For this chart, it excludes Norway. ‘OECD Asia-Pacific’ includes Australia, Japan, Korea and New Zealand. ‘Other Asian EMEs’ includes Hong Kong (China), India, Indonesia, Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam. ‘Oil exporters’ includes Algeria, Angola, Azerbaijan, Bahrain, Brunei, Chad, the Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kazakhstan, Kuwait, Libya, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sudan, Timor-Leste, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela and Yemen. The trade elasticity in Panel B is calculated as the ratio of world and regional trade growth to GDP growth, both measured in constant US dollars.

Source: OECD Economic Outlook 119 database; and OECD calculations.

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Global current account balances are projected to decrease slightly over the projection period (Figure 1.20). The current account deficit of the United States is projected to decline from 3.6% of GDP in 2025 to 3.1% in 2026 and 2027, helped by higher revenue from net energy exports and relatively subdued import growth in 2026. The euro area surplus is projected to decline from 2.6% of GDP in 2025 to 1.9% in 2026, before recovering somewhat to 2.2% in 2027. In Asia’s largest economies, current account surpluses are projected to rise from 2025 levels, with the exception of India. China’s current account surplus is expected to rise from 3.8% of GDP in 2025 to 4.0% by 2027, and that of Japan from 4.8% to 5.4% of GDP. Korea is also projected to have a sharp increase in its external balance, from 6.6% of GDP in 2025 to around 10% of GDP in 2027, helped by continued strong IT-related exports. Sharp changes in energy prices provide favourable terms of trade dynamics for oil producers, although for Gulf economies, trade volumes are not able to respond until after the shock of the conflict has dissipated.

Figure ‎1.20. Current account imbalances are projected to decline slightly

Contributions to global current account

Note: ‘OECD Europe’ includes the OECD members of the European Union, Iceland, Switzerland, Türkiye and the United Kingdom. For this chart, it excludes Norway.; ‘OECD Asia-Pacific’ includes Australia, Japan, Korea and New Zealand; ‘Other Asian EMEs’ includes Hong Kong (China), India, Indonesia, Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam; ‘Oil exporters’ includes Algeria, Angola, Azerbaijan, Bahrain, Brunei, Chad, the Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kazakhstan, Kuwait, Libya, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sudan, Timor-Leste, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela and Yemen.

Source: OECD Economic Outlook 119 database; and OECD calculations.

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Prolonged disruptions would inflict a significant further hit to global growth and add to inflationary pressures

The prolonged disruption scenario is one which the current situation persists well into 2027, with the supply of energy and other critical inputs from the Gulf economies remaining impeded. Global energy supply is assumed to remain 10% lower than the pre-conflict level, with exports from the Middle East economies reduced by 40%. Disruptions to energy production are also assumed to impede production and exports of other critical inputs from the Middle East, notably fertilisers. Faced with a sustained period of lower supply, significant declines in global energy demand are required to bring energy markets into balance. In part this is likely to occur due to shortages of energy and energy products as public and private strategic reserves are depleted, but a sustained period of higher energy (and fertiliser) prices is also likely to occur. These factors will weigh relatively heavily on net energy importers, but will also be felt around the world via higher consumer prices and shortages of inputs from global supply chains (Box 1.2), leading to lower output and energy use across all industries.

Illustrative simulations using the NiGEM global macroeconomic model in forward-looking mode highlight the potential global outcomes in this scenario.

• Oil and gas prices are assumed to rise by 50% relative to the time-limited disruption scenario from the third quarter of 2026 to the third quarter of 2027, when supplies gradually begin to recover, with the increase in energy prices fading gradually thereafter. Fertiliser prices are also assumed to rise to a similar extent, raising agricultural input costs, with food prices up by 4% in 2027.

• Shortages, and the potential loss of efficiency from disruptions to exports of specialised inputs into industrial processes from the Gulf economies, are assumed to result in an enforced rationing of energy for businesses, proxied by a reduction in technical efficiency. In the scenario, efficiency is allowed to decline by 2% in all Asian economies, apart from China, as well as New Zealand and Türkiye, reflecting the stronger direct plus indirect exposure of these economies to energy produced by the Gulf economies (Box 1.2). In all other economies, technical efficiency declines by 1%.

• These developments can also be expected to adversely affect confidence and result in a significant tightening of financial conditions. In the scenario this is proxied by an (ex-ante) increase of 1 percentage point in the household savings ratio, an increase in risk premia and a decline in equity prices of 15%. The risk premia shocks vary across countries, with investment risk premia assumed to rise by 75 basis points in the advanced economies and 100 basis points in emerging and developing economies. The term premium on government long-term bonds is also assumed to increase by 50 basis points, placing upward pressure on debt servicing costs.

Taken together, these shocks could reduce global GDP growth by 0.7 percentage points in 2026 and 1.3 percentage points in 2027 relative to the time-limited disruption scenario, bringing aggregate world GDP growth down to 2.1% and 1.8% respectively (Figure 1.21, Panel A). Such rates are extremely low outside of major global recessions such as the global financial crisis or the pandemic, when global output declined, and some countries could experience an outright recession. Higher input prices would also push up global inflation further, by 0.4 percentage points in 2026 and 1.3 percentage points in 2027, even though their impact on costs and output prices is partially mitigated by the weakness of final demand (Figure 1.21, Panel B). Higher prices and a weaker labour market would hit real incomes and household spending, adding to the spending reduction from higher precautionary saving. Business investment would be hit by the higher cost of capital and weak demand, declining by close to 5% by the latter half of 2027 relative to the time-limited disruption scenario. Even as the assumed set of shocks begins to fade from the fourth quarter of 2027 onwards, the period of prolonged disruption will have persisting effects, with potential output in many economies at the start of 2028 between 1‑1½ per cent lower relative to the time-limited disruption scenario, making fiscal positions more challenging and lowering future living standards.

The impact of the different shocks will vary across economies, with that on inflation being relatively higher in emerging and developing economies, reflecting the greater share of energy and food prices in their consumer price baskets. Many economies in Asia are likely to be hit heavily, reflecting their relatively high reliance on energy inputs from the Gulf economies, but higher inflation, shortages, tighter financial conditions and weaker confidence are also likely to weaken growth significantly in Europe and North America.

In the near-term policy interest rates rise by between 50-75 basis points in most economies to help ensure that inflation expectations remain anchored, with private sector inflation expectations relatively sensitive to changes in energy and food prices. However, these increases are short-lived with the downside effects on output and demand intensifying into 2027. The automatic budgetary stabilisers are allowed to cushion the effect of the shocks, pushing up government budget deficits by between ¼- ½ per cent of GDP in the typical economy in 2027 and raising government debt-to-GDP ratios, but no additional discretionary fiscal support is assumed to be provided to cushion the impact of the shocks.

Figure ‎1.21. A prolonged disruption scenario raises inflation and hits growth

Percentage points change from the time-limited disruption scenario

Note: The prolonged disruption scenario assumes oil, gas and fertiliser prices rise by 50% relative to the time-limited disruption scenario from 2026Q3 to 2027Q3, followed by a gradual decline as supplies recover. The scenario also assumes lower technical efficiency due to energy rationing and supply-chain disruptions, higher household saving and tighter financial conditions. See text for further description of the shocks implemented.

Source: OECD calculations using the NiGEM macroeconomic model.

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Box ‎1.2. Exposures to energy supply from the Persian Gulf

Heightened geopolitical tensions in the Middle East have renewed concerns about the exposure to disruptions in energy supply and prices. Such exposure varies across countries and sectors, reflecting differences in both direct use of energy from the region and indirect exposures via underlying production linkages within and across economies.

The direct dependence on energy imports from the Persian Gulf region differs markedly across economies (Figure 1.22). Asian and European economies tend to exhibit relatively higher import intensities compared to countries in the Americas, with Thailand, Korea, India and Greece having a particularly strong reliance on crude oil and refined petroleum from Gulf suppliers. In contrast, the United States and other commodity producers have lower direct exposure, reflecting greater domestic energy production and more diversified energy sourcing. Some smaller energy-importing economies also have limited exposure, in part reflecting relatively small or less energy-intensive industrial bases.

Direct import dependence provides only a partial measure of overall exposure to energy supplies from the Middle East. Once indirect linkages through domestic and international supply chains are taken into account, overall exposure to Middle East energy increases significantly (Figure 1.23), particularly in economies where relatively high direct dependence coincides with strong upstream linkages, compounding their exposure. Many Asian countries remain among the most exposed, including Thailand, Korea, India, Japan and Chinese Taipei. Indirect channels via supply chains account for a large share of total exposure and often exceed direct dependence.

Figure ‎1.22. Reliance on Persian Gulf energy imports varies across economies

Direct intermediate imports of energy by source as a share of gross output, 2023

Note: Energy imports refer to intermediate inputs used in production and cover energy mining and coke and refined petroleum (ISIC Rev. 4 divisions 5, 6, and 19). Bars show imported energy intensity for each country defined as the sum of imports from energy exporters as a share of gross output. The Persian Gulf countries identified separately in the data are the United Arab Emirates and Saudi Arabia. Direct imports from selected other Persian Gulf economies included within the Rest of World (Iran, Iraq, Kuwait, Qatar, Oman, and Bahrain) are estimated by applying their share of Rest of World (ROW) energy trade―derived from OECD BIMTS―to ICIO energy imports from ROW. Calculations are based on the 2023 ICIO table in current prices, which are projections based on available national accounts data.

Source: OECD PYP ICIO dataset (edition 2026, forthcoming); OECD Balanced International Merchandise Trade Statistics (edition 2026 January); and OECD calculations.

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Figure ‎1.23. Indirect linkages significantly increase economies’ exposure to Persian Gulf energy

Direct and indirect intermediate energy imports from the Persian Gulf as a share of gross output, 2023

Note: See notes to Figure 1.22 for the definitions of the goods covered, the Persian Gulf countries included and the calculations to obtain the adjusted direct exposure to imports from the Persian Gulf countries. This adjusted direct exposure is used to compute total (direct and indirect) exposure via the Leontief inverse. Regional exposure is calculated as a gross output–weighted average across sectors, with exposure defined as energy imports from the Persian Gulf as a share of gross output. Calculations are based on the 2023 ICIO table in current prices which are projections based on available national accounts data.

Source: OECD PYP ICIO dataset (edition 2026, forthcoming); OECD Balanced International Merchandise Trade Statistics (edition 2026 January); and OECD calculations.

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Beyond the cross-country differences, the effects of such shocks would vary widely across sectors due to differences in reliance on energy inputs and the characteristics of production networks. Within the OECD region, sectors such as coke and refined petroleum and, to a lesser extent, electricity, gas and steam tend to have a relatively high overall exposure to Persian Gulf energy inputs (Figure 1.24, Panel A). This is driven primarily by their direct reliance on energy from the region, with additional indirect exposure arising from upstream domestic and foreign inputs—such as electricity, chemicals, transport, and machinery—which themselves embed Gulf energy use. Transport services, chemicals, and basic metals are amongst the more exposed sectors when supply-chain linkages are taken into account. Even sectors with limited direct energy use—including machinery, construction and services—remain exposed through production networks. As a result, indirect effects are both widespread and account for a large share of overall exposure. These operate primarily through refined petroleum products and electricity inputs embedded in production. Direct exposure to Persian Gulf energy is primarily linked to crude oil and natural gas imports.

Sectoral exposure also differs across countries and regions. The highest overall exposure is in the dynamic Asian economies, including many small open economies in Southeast Asia. This reflects strong direct reliance on Persian Gulf energy and significant indirect reliance through production networks (Figure 1.24, Panel B). Country dispersion in exposure is also larger, but even the dynamic Asian economies at the lower end of the distribution have a higher exposure than the median OECD economy. Energy-intensive sectors, such as coke and refined petroleum, transport services, chemicals and energy mining, are the most exposed, with both manufacturing and services sectors impacted via their upstream linkages. Overall, indirect exposure is widespread across sectors within each region, underscoring how reliance on Gulf energy extends beyond the most energy intensive sectors.

Figure ‎1.24. Exposure to Persian Gulf energy varies widely across sectors

Total (direct and indirect) intermediate energy imports from the Persian Gulf as a share of gross output, 2023

Note: Energy imports refer to intermediate inputs used in production and cover energy mining and coke and refined petroleum (ISIC Rev. 4 divisions 5, 6, and 19). Dynamic Asian economies include: Hong Kong (China), Malaysia, the Philippines, Singapore, Thailand, Chinese Taipei and Viet Nam. The Persian Gulf countries identified separately in the data are the United Arab Emirates and Saudi Arabia. Direct imports from selected other Persian Gulf economies included within the Rest of World (Iran, Iraq, Kuwait, Qatar, Oman, and Bahrain) are estimated by applying their share of Rest of World (ROW) energy trade―derived from OECD BIMTS―to ICIO energy imports from ROW. This adjusted direct exposure is used to compute total (direct and indirect) exposure via the Leontief inverse. Sectoral exposure is calculated as a gross output–weighted average across regions, with exposure defined as energy imports from the Middle East as a share of gross output. Calculations are based on the 2023 ICIO table in current prices which are projections based on available national accounts data. Percentiles refer to the country distribution within each area, calculated separately for each sector.

Source: OECD PYP ICIO dataset (edition 2026, forthcoming); OECD Balanced International Merchandise Trade Statistics (edition 2026 January); and OECD calculations.

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Risks

The prolonged disruption scenario could have unexpectedly adverse impacts on a wider range of countries or industries

Other disruptions to global supply chains could emerge, with such risks becoming more acute in the prolonged disruption scenario. Shortages could be stronger than expected and become apparent in a wider range of countries, especially those with lower incomes that struggle to afford higher prices, with negative international spillovers through global supply chains. The global economy is much more interconnected now than in previous decades, increasing the force with which such spillovers could propagate, although this is partially offset by the decline in energy intensity over time.

Shortages could be particularly damaging for certain growth industries in the global economy, such as AI. The significant energy price shocks or energy shortages associated with the prolonged disruption scenario would increase data centre operating costs and constrain the supply of critical hardware used in AI systems (Box 1.3). Furthermore, longer-lasting closure of gas production facilities and trade through the Strait of Hormuz would reduce the availability of other commodities used intensively in the manufacture of AI‑related inputs, such as helium. These effects could further reduce the capacity and incentive for AI investment, leading to notably weaker growth in those economies currently being boosted by AI-related investment and production. Ongoing disruption to fertiliser supply could reduce crop yields over the coming years by more than anticipated, resulting in more substantial food price inflation that risks increasing poverty rates. More broadly, a prolonged disruption increases the risk of medium-term inflation expectations becoming de‑anchored, creating second round effects that push inflation higher. Both the fact that this supply shock comes soon after the 2022-23 inflation spike and the salience of energy and food prices for inflation expectations may increase the risk that inflation expectations become de-anchored.

Box ‎1.3. The potential impact of an energy price shock on AI infrastructure

AI infrastructure is heavily dependent on energy systems and global value chains. As such, energy price shocks or energy shortages can hinder AI investment. In addition to the impact of such a shock through demand and financial conditions, the effect may arise through three main channels:

• Data centre operating costs - energy accounts for 60 percent of data centre operating costs, making AI service costs highly sensitive to electricity prices (IEA, 2025). Countries with a high share of electricity generation from imported fossil fuels will be more exposed to energy price shocks or shortages, potentially weakening data centre investment.

• Hardware production – The production of ICT hardware that underpins AI systems is highly electricity‑intensive, reflecting the energy demands of advanced lithography, clean‑room operations, and cooling systems. Moreover, the manufacture of key components, most notably semiconductors, depends heavily on energy‑ and petrochemical‑intensive processes that rely on imported feedstocks, particularly from the Middle East.

• Trade and logistics - AI hardware components (GPUs, servers, networking equipment) are heavily traded across borders, meaning that a spike in trade costs could impact associated value chains. For example, during the Red Sea crisis (2023–2024), shipping costs surged and delivery times rose, including for construction materials used in data centres.

In addition, the escalation of the conflict may reduce AI capacity in the Middle East. Large-scale AI infrastructure projects, including multi‑gigawatt data centre campuses, are closely linked to sovereign wealth funds and state-backed capital (IDC, 2026). Prolonged geopolitical tensions could delay or halt these projects, affecting global inference capacity expansion and its geographic distribution. The conflict may also directly threaten AI-related infrastructure in the region, hitting output and productivity. For example, drone attacks in March on web services facilities in the United Arab Emirates and Bahrain disrupted regional cloud services (Jabbour, 2026).

Corporate debt strains may amplify risk repricing in financial markets and constrain investment and growth

Tightening financial conditions and rising refinancing needs could increase the debt service burdens of non‑financial firms in both scenarios, but particularly in the prolonged downturn scenario, posing risks to profitability and the availability of internal finance for investment. In the third quarter of 2025, total corporate debt in G20 economies amounted to around USD 90 trillion—equivalent to roughly 90% of GDP (Figure 1.25, Panel A), only marginally below the pandemic peak. Borrowing costs have risen sharply. Close to one‑half of outstanding investment‑grade bonds now carry interest rates above 4%, for the first time since 2015, and the cost of outstanding debt is converging towards the cost of new issuance (OECD, 2026c). A quarter of corporate debt will mature in the next three years (Figure 1.25, Panel B) and was largely issued during the low‑rate period of 2018‑21, resulting in substantial refinancing needs at significantly higher costs. This is compounded by a structural shift towards shorter‑maturity issuance. Relatedly, prolonged energy supply disruptions and their effects on activity and financial conditions could constrain refinancing for financially weak issuers, raising pressure on debt‑servicing burdens and lifting global speculative‑grade default rates if growth were to weaken sharply (S&P, 2026b).

Risks in corporate debt markets are being compounded by the rapid expansion of the AI sector, amid elevated valuations of AI-related stocks, raising repricing risk for AI investing forms and also for firms whose business models are vulnerable to AI‑driven disruption. AI companies, notably the “Magnificent Seven”,4 are undertaking large capital expenditure programmes that outstrip earnings growth and are projected to reach USD 1.1 trillion in 2027 (Figure 1.26, Panel A). This increases their sensitivity to changes in market sentiment and valuation assumptions.5

The interplay between concentration, rising leverage and substantial reliance on opaque financing models by AI companies could amplify shocks if expected returns on AI investments fail to materialise and private lenders are exposed to correlated valuation shocks across a wide range of AI-related assets. Given the high reliance of AI firms on energy, these risks are magnified in the prolonged disruption scenario. For instance, AI firms are increasingly using both marketable debt and less transparent private capital finance (Figure 1.26, Panel B), raising refinancing risks if expectation of future returns and equity valuations adjust. AI companies now account for a large and growing share of investment‑grade bond issuance in 2025, with this pattern expected to continue in 2026–27. This could exert upward pressure on interest rates and credit spreads as investors absorb a higher amount of corporate bond issuance. Widespread circular financing arrangements among AI firms, with AI firms acting as both borrowers and creditors to one another, also raise interconnectedness and contagion risks in the sector (IMF, 2026).

More broadly, slower growth and higher corporate debt service burdens could also force companies to scale back investment. Prudent management is required to ensure that corporate debt fragilities do not act as a significant brake on future growth (Aldasoro et al., 2026), or spill over to the balance sheets of banks and non-bank financial intermediaries (Federal Reserve, 2025). Banks may be directly affected by rising losses on loans to stressed corporates, but also indirectly via exposure to non-bank lenders such as private credit funds, potentially weakening their capital buffers and their ability to provide credit to the real economy.

Figure ‎1.25. Companies face challenges from elevated debt and rising debt refinancing costs

Note: Panel A shows total credit — comprising loans and bonds — extended to non‑financial corporates in G20 economies. Quarterly data at current prices are converted to 2025 Q3 prices using the US consumer price index. Panel B shows bonds issued by non‑financial corporations maturing in 2026-30 by cost.

Source: Bank for International Settlements (BIS) credit to the non-financial sector database; OECD (2026), Global Debt Report 2026; and OECD calculations.

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Figure ‎1.26. AI investment is rising rapidly, with increased reliance on market-based financing

Note: In Panel A, the “Magnificent 7” comprises Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Other AI companies are identified based on the constituents of the iShares and X‑trackers exchange traded funds invested in AI firms as of December 2025. Projections for 2026 and 2027 as of 20 May 2026. Earnings are measured by EBITDA – earnings before interest, tax and amortisation. Panel B displays US corporate bonds outstanding for the “Magnificent 7” and other US AI companies, alongside private credit exposures by US business development companies to software and technology services firms and US private equity investments in software companies.

Source: Bloomberg; LSEG; White & Case; and OECD calculations.

Vulnerabilities in private capital funds could pose risks to financial stability in either scenario

Risks for private credit and equity funds have increased, reflecting growing concerns about fund liquidity and asset quality and valuations, compounded by opacity in parts of the non‑bank financing ecosystem. These concerns have been reflected in declining stock market performance (Figure 1.27, Panel A). Globally, the assets managed by private equity and credit funds are estimated to have risen from USD 3 trillion in 2012 to USD 15 trillion in 2025.6 US private equity and private credit funds account for around 57% and 62% of the global assets of those funds.

Private equity and credit funds are particularly exposed to the performance of technology‑related companies, with the software sector accounting for 20% of US business development companies’ portfolios7 and 42% of new investments of US private equity funds in 2025 (Figure 1.27, Panel B). Divestments remain challenging in the software sector, as private equity firms struggle to realise the high valuations paid for acquisitions in 2020–21. Valuations of tech‑linked loans have also been slow to adjust. Following the failure in 2025 of two large borrowers funded by private credit (Tricolor and First Brands Group), write‑downs at large US private credit funds have gathered pace in 2026, triggering redemption requests by investors (Congressional Research Service, 2026). In a number of funds, actions were taken to limit redemptions, reflecting risks around liquidity mismatches. Stress in one segment of the private capital market can spill over to another, as large private capital funds often manage both private equity and private credit portfolios, and private credit funds frequently lend to companies owned by private equity funds.

There are increasing concerns about the opacity of valuations in the private capital sector, with losses from certain exposures sometimes becoming apparent only with a delay. Growing concerns about overestimated outdated valuations—given the significant discretion fund managers retain over valuing illiquid positions—and deteriorating fundamentals are compounded by the rising use of payment‑in‑kind loans by private credit companies since 2023, with interest and principal both paid at maturity (Karoui and Cazaubieilh, 2026). The increasing exposure of private capital funds to AI‑linked collateral—such as data centres and chip‑collateralised loans—may also raise investor concerns about the long‑term value of these assets, given rapid technological obsolescence, limited price history and valuations potentially inflated by short‑term chip shortages (Kim and Armstrong, 2025). This is particularly important as some specific loans to AI borrowers, as well as AI issuers, have started to be rated for loan securitisations (Gimple, 2026), potentially leading to sharp downgrades in event of a downturn. These developments underscore the sensitivity of private credit funds—particularly those offering liquidity to retail investors—to shifts in sentiment, and could possibly result in the sector facing constraints at a time when corporate financing needs continue to rise.

Figure ‎1.27. Performance of private credit and equity funds and their exposure to the software sector

Note: In Panel A, the equity benchmark for US private credit funds is the S&P US business development companies (BDCs) Index, which tracks major publicly traded BDCs. For US private equity funds, the benchmark is the S&P Listed Private Equity Index, covering leading publicly listed firms active in private equity. For comparison, the MSCI World (covering all sectors in advanced markets) and the LSEG developed markets software sector indices are also shown. Latest data points are as of 27 May 2026. Panel B presents the sectoral distribution of private credit exposures of US BDCs and US private equity investment funds at end‑2025.

Source: Houlihan Lokey; White & Case; LSEG; and OECD calculations.

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The rapid expansion of private credit over the past decade has deepened the interconnections with traditional financial intermediaries, which have invested in, or lent to, private credit funds (Berg and Lee, 2026).8 This raises potential adverse spillover risks. Competition in lending markets is also being reshaped, particularly in the United States, with banks ceding activity to alternative lenders following post‑GFC regulatory tightening, and expanding their lending to non‑bank financial institutions (Figure 1.28, Panel A). Loans to private capital funds account for a substantial share of the NBFI loan portfolios of large US banks in 2025 (Figure 1.28, Panel B), with unutilised credit lines implying that actual exposures may exceed on‑balance‑sheet figures.

Banks and NBFIs could both face losses in the event of distress in private credit funds, with multiple layers of leverage across borrowers, funds and end‑investors potentially amplifying risks of liquidity shortages, potential fire sales and simultaneous deleveraging (Cera et al., 2026). Although most private credit funds are not highly leveraged, some use derivatives for leverage (Federal Reserve, 2023; Berg and Lee, 2026), and may also permit early redemptions. This heightens liquidity risk amid limited transparency in private markets.

Figure ‎1.28. Banking sector exposure to NBFIs is rising in advanced economies

Note: Panel A shows total claims of banks (i.e. loans, debt securities and derivatives) to non-bank financial intermediaries (NBFIs) across selected advanced economies. Data are expressed as a share of total banks’ claims to all sectors. The data are reported as of Q4 for each year. The consolidated banking statistics capture the worldwide claims by counterparts (both domestic and foreign) of banking groups based in reporting countries and exclude intragroup positions, similar to the consolidation approach followed by banking supervisors. In Panel B, US bank loans to NBFIs by segment are sourced from Schedule RC-C (Loans and Lease Financing Receivables) of the Consolidated Reports of Condition and Income (Call Reports). Percentages are calculated using domestic Call Report data for the 49 large institutions for which data are available.

Source: Bank for International Settlements (BIS); Federal Financial Institutions Examination Council; and OECD calculations.

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Tighter financial conditions, higher energy prices and shortages of key products raise risks in emerging‑market economies

Near-term risks in emerging-market economies have risen with the tightening of global financial conditions and could intensify, particularly in the prolonged disruption scenario. Net portfolio capital flows were increasing in most EMEs up to early 2026, helped by improved global risk appetite. The onset of the conflict and the associated increase in risk aversion has led to marked changes. Outflows from most EME funds have accelerated, driven primarily by equity funds, with Latin America a notable exception (EPFR, 2026). Many Asian economies have been particularly affected, reflecting their reliance on energy imports from the Middle East. The magnitude of capital outflows from EMEs has already surpassed levels observed during recent episodes of elevated geopolitical risk (IMF, 2026). This has been partly reflected in the sharp depreciation of some local currencies against the US dollar, including for India, Indonesia, the Philippines and Thailand.

Energy exporting countries generally stand to benefit from higher oil and gas prices (provided supply is not restricted) but most emerging and developing economies are net energy importers and face terms of trade and income losses, as well as possible supply shortfalls. This is the case in much of Southeast Asia, with energy imports in Pakistan, India, Bangladesh, Thailand, Viet Nam and the Philippines accounting for between one-third and two-thirds of domestic consumption. Chile and Costa Rica also import substantial amounts of energy, and energy imports account for the majority of energy use in Morocco and Türkiye (World Bank, 2026). Several countries are particularly exposed to oil and gas supplies from the Middle East and face a higher risk of energy shortages. Around 90% of Pakistan’s oil and gas imports, and half of those by India and Thailand, come from the Gulf.

Policies to cushion the rise in fuel prices can be costly, and could be challenging to implement given limited fiscal space in many emerging and developing countries, raising risks of a sharper decline in output. However, sovereign bond yields in larger energy-importing EMEs have so far risen only moderately. Many countries have placed greater emphasis on energy-saving measures, such as working‑from-home mandates, reduction of travel for civil servants, decreased use of electricity in government buildings and lower public transport fares. In the prolonged disruption scenario, many emerging and developing economies may find that it is too costly to provide support to cushion the shocks.

Sovereign borrowing risks rise in both scenarios given higher interest rates and weaker GDP growth. Sovereign debt has almost doubled relative to GDP since 2010 and refinancing will be costlier. A challenge facing many EMEs will be to refinance a large share of outstanding bond debt in the next few years (OECD, 2026c). For instance, low-income countries are estimated to have 29% of their outstanding sovereign bonds by end-2025 maturing in the course of 2026. In this context, deteriorating economic conditions and larger budget deficits might make borrowing significantly more difficult, raising risks of sovereign default.

Continued disruption could further raise the price of fertilisers from the Middle East and possibly their availability (Box 1.4). This could affect planting and harvesting seasons over 2026 and 2027, reducing yields and potentially leading to higher food prices over time (OECD, forthcoming, Hebebrand et al., 2026 and Arita and Glauber, 2026). Ongoing disruptions to the supply of fertiliser inputs, such as urea, ammonia and sulphur, alongside high energy prices, could further raise global prices of fertilisers, reducing application rates in many poorer countries, with significant risks that millions of people could be pushed into extreme poverty (UNDP, 2026).

Box ‎1.4. Fertiliser exports from the Persian Gulf, food price risks and policy options

The Persian Gulf economies are important exporters of synthetic fertiliser and fertiliser inputs, collectively accounting for 35% of global urea exports, and 20% of ammonia, as well as around 20% of liquefied natural gas exports, which is needed to create any nitrogen-based fertiliser.1 The region is also important for phosphate-based fertilisers, including products such as diammonium phosphate, as well as critical inputs such as ammonia and sulphur, which are particularly important for key global phosphate-based fertiliser producers such as Morocco and Egypt.2 A prolonged disruption to production and exports due to the conflict in the Middle East could further raise prices of fertiliser and fertiliser inputs globally, with implications for crop yields and food security. This box assesses the potential risks and possible policy responses, focusing on nitrogen-based fertilisers since the application of phosphate-based fertilisers can usually be delayed with fewer immediate consequences.

A number of key grain producers, including Brazil, Türkiye and Australia, as well as a number of smaller economies in Africa, are highly reliant on imports from the Persian Gulf to meet their fertiliser needs (Figure 1.29). Other major grain producers such as India and the United States rely more on local production than imports to meet their fertiliser needs, although the Gulf is an important supplier of their imported fertilisers.

Figure ‎1.29. Agricultural reliance on Persian Gulf imports for nitrogen fertilisers

Ratio of imported fertilisers to all fertilisers used for agriculture

Note: The figure shows the quantity of imported nitrogen-based fertilisers as a share of the total quantity of nitrogen-based fertilisers applied for use agriculturally. Net imports equal to one mean the country relies on imports to meet its fertiliser needs. A figure of less than one suggests domestic production is used to meet fertiliser needs, with numbers close to zero suggesting imports are not very important; a number less than zero (not shown) exists for countries which are net exporters (e.g. China, Russia and Saudi Arabia). Some countries import fertilisers and re‑export them (e.g. Korea). These re-exports account for the difference between net and total imports and are not shown. Persian Gulf countries are Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. Shares of imports from the Persian Gulf are based on the FAO trade matrix database; agricultural use and gross and net imports are based on the FAO nutrient database.

Source: Food and Agriculture Organisation (FAO) Agricultural database; and OECD calculations.

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Supply disruptions from the closure of the Strait of Hormuz are adding to pressures in global fertiliser markets. In addition to the direct disruptions to urea and ammonia supply, which are difficult to re‑route, higher natural gas prices raise fertiliser production costs, even for those countries which are not directly dependent on the Gulf for imported fertilisers, including net fertiliser exporters. Rising input costs can lower local production, raising demand for imports - and global fertiliser prices.3 At the same time, export controls from China, designed to keep domestic fertiliser prices low, have lowered the global supply of nitrate fertilisers. Lingering effects from Russia’s war of aggression on Ukraine have reduced Europe’s domestic fertiliser production, whilst also lowering Russia’s ammonia exports. In response, related Middle East fertiliser prices have risen, with ammonia prices up around 59% since 27 February, and urea prices up 39%. Nonetheless, to date, prices remain below 2022 levels (Figure 1.30, Panel A).4

If sustained, higher fertiliser prices and shortages of supply have important implications for future food prices in both advanced and emerging-market economies, particularly over the next two years. OECD model-based estimates of the impact of simultaneous fertiliser and energy price shocks suggest that a rise of almost 50% in global fertiliser prices (consistent with a global oil price shock of USD115 per barrel) would result in an average rise of 4% in agricultural commodity prices in 2026 and around 8% in 2027 relative to baseline levels, albeit with significant variations (Figure 1.30, Panel B). Grains are most affected, along with the prices for commodities that serve as substitutes for energy.

There are already some signs of upward price pressures on cereals, with FAO estimates suggesting that global cereals prices in April were 2.4% higher than in February. However, high global grain inventories and bumper harvests may dampen further immediate food price reactions. In the short term, many farmers can respond to higher fertiliser prices by running down inventories. If fertiliser prices are still high in the second half of the year when the winter planting season commences in Europe, the United States and China, there will be fewer inventories to act as buffers and less scope to delay fertiliser purchases and applications.5 Damage to Gulf production facilities for LNG and urea, as well as the risk of only a slow normalisation of the flow of goods through the Strait of Hormuz, mean fertiliser prices are likely to remain higher for longer than the duration of conflict in the Middle East. Futures contracts are pricing in higher grains prices over time, reflecting this risk.

Because the Persian Gulf is a net food importer, the conflict is not expected to directly affect crop supply. However, higher fertiliser and energy prices will lower fertiliser affordability, hit household incomes and reduce crop yields, and thus impact food security globally. Smaller developing countries could experience severe hunger impacts, given stubbornly high post-pandemic food insecurity (WFP, 2026). If fertiliser prices remain well above grains prices ahead of the next planting season, this risk will worsen significantly given the difficulties of financing new purchases. Possible switches to biofuel production to reduce shortages of oil could also amplify food price volatility (FAO, 2026).

Figure ‎1.30. Fertiliser price rises raise food prices

Note: Panel A are prices are for Middle East benchmarks. Panel B shows the impact of a simultaneous shock to oil and fertiliser prices relative to baseline, including an additional price impact for countries which are highly reliant on Persian Gulf fertiliser imports.

Source: Bloomberg; OECD (2026f); and OECD calculations.

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Possible policies in response to fertiliser shocks include subsidies to farmers to offset the higher cost of fertilisers (India is a long-standing example, whilst Spain and Greece have introduced new measures) and export restrictions on fertiliser products and inputs (China) (OECD, 2026a). Whilst support for farmers and vulnerable countries is critical to limit the human cost of rising food prices, policies need to be carefully calibrated. Export restrictions are particularly harmful and will only exacerbate global shortages and price increases. Together with subsidies, they can often distort incentives for efficient fertiliser use in times of shortages, whilst also often being weakly targeted. Efforts to support freer trade and safe passage would support trade normalisation across a range of goods. More broadly, consideration should be given to the incentives that govern industrial use of fertiliser inputs, as well as biofuel production, given periods of potential food market stress. Over the longer term, governments should continue to prioritise policies that support the development of slow-release, organic and microbial fertilisers (FAO, 2026; OECD, 2023a; Hebebrand et al., 2026).

1. All nitrogen-based fertilisers use hydrogen from natural gas, which is combined with nitrogen to create ammonia. Natural gas is also often used as the energy source for this chemical reaction. Urea is produced with ammonia, carbon and oxygen using heat (usually from natural gas) and pressure. Diammonium phosphate and monoammonium phosphate are created using sulphur, which is converted into sulphuric acid and reacted with phosphate rock to create phosphoric acid, which in turn is reacted with ammonia.

2. Synthetic fertilisers are typically classified by nutrient: nitrogen (which includes products such as ammonia and urea), phosphorous and potassium. Each nutrient is a complement rather than a substitute for the other. Nitrogen is the most fundamental nutrient as it ensures healthy plant development and that plants are nutritious once harvested. Phosphorus supports a plant’s ability to use and store energy, and helps with normal development. Potassium strengthens a plant’s resistance to disease and its overall quality (OECD/FAO, 2023).

3. This occurred in 2022 when Europe, which accounts for about 10% of global imports, reduced domestic production of ammonia and urea due to higher natural gas prices, and raised imports.

4. Russia is a major fertiliser user and producer, accounting for 8% of world production and 15% of world exports in nitrogen fertilisers; the Persian Gulf economies account for almost 7% of production and 20% of global exports in 2023.

5. The winter wheat planting season typically begins in September for China, US and Europe, and August for the former Soviet Union states; Brazil’s first season of corn planting begins in October, whilst India’s dry season rice planting begins in November.

Households could be reluctant to lower saving buffers in the time-limited disruption scenario

Household consumption growth could be harder hit than currently envisaged, even if the energy market disruption is relatively short-lived. The projections for the median OECD economy in the time-limited disruption scenario are characterised by a brief slump in private consumption growth in the second quarter of 2026 before a relatively rapid recovery leaves the level of real private consumption back at its pre-conflict trend by mid-2027. The bounce back in consumption is enabled by a projected fall in household saving rates in many economies. However, ongoing political and geopolitical uncertainty, combined with the deterioration in purchasing power following the inflation spike, could have a more prolonged dampening impact on consumer confidence and possibly even raise precautionary saving. Recent OECD work has highlighted that inflation in energy and food prices has a particularly large and persistent negative impact on consumer confidence, given the salience of these items for household consumption baskets. Moreover, these impacts are estimated to be particularly evident for lower income households, who tend to have a higher marginal propensity to consume (Ollivaud and Westmore, 2026).

Uncertainty remains about future trade policies

There is considerable uncertainty regarding the path that will be taken by trade policy over the coming months. The US administration has launched two new trade investigations, into unfair labour practices and excess capacity, which are scheduled to be finalised by late July 2026, when the temporary 10% tariff ends. The Office of the US Trade Representative is legislatively responsible for implementing trade actions following these investigations, under the direction of the President. They are able to take into account not only the findings but also engagements with trading partners when calibrating responses. The size and distribution of these tariffs and how they may differ with current tariff assumptions could either raise, lower or leave unchanged the risks to the outlook for trade and GDP growth.

An early negotiated settlement to the current conflict could have stronger effects than projected

In the time-limited disruption scenario, energy prices are assumed to evolve along the lines of their futures curves as of May 26. An early negotiated settlement to the conflict could result in a sharper fall in oil prices than assumed if market confidence about the durability of the settlement improves. Such a decline would not change oil supply prospects substantially in the near term relative to the time-limited disruption scenario, but would lower price pressures and potentially policy interest rates, and improve financial market sentiment. An illustrative simulation using the NiGEM global macroeconomic model suggests that a 10% decline in oil, gas and fertiliser prices relative to the time-limited disruption scenario from the third quarter of 2026 onwards, would raise global GDP growth by an additional 0.1 percentage point in 2027 and lower global inflation by 0.3 percentage points.

There are other potential sources of upside surprises to the outlook

There are several additional factors that could generate upside surprises to the global economy over the next two years. These are especially relevant in event of an early resolution to the conflict. It may be that firms are more adaptable than expected in the face of the geopolitical shock. Businesses have proven remarkably resilient to recent adverse developments, such as higher trade barriers, the pick-up in inflation and rising labour shortages, and might be able to adapt their operations and supply chains to cushion the impact of the conflict more effectively than currently assumed. A further reduction in policy uncertainty, including through new trade agreements or reductions in tariff rates, could also give businesses more confidence in implementing long-term investment plans.

Investment could also be stronger if optimism about the economic benefits from artificial intelligence technologies further strengthens. The United States has accounted for much of the growth in AI-related capital spending so far, but other major economies could increasingly derive benefits from this spending and also increase AI-related capital investment more rapidly themselves, for example through faster and more widespread adoption of AI tools. The effect on economic growth could be compounded if such spending were to translate into a sustained improvement in aggregate productivity growth. While the extent and timing of productivity gains related to the adoption of AI is highly uncertain, such gains may become more visible than currently anticipated over the next two years. This is especially the case if firms undertake complementary investments in human and organisation capital that integrate AI in a way that enhances business processes. Countries with low current levels of AI adoption may also be able to learn from the experience of countries that have already achieved higher levels of AI adoption, resulting in steeper adoption rates that more quickly translate into productivity benefits.

Policies

Monetary policy should remain vigilant

Most central banks in the large advanced economies have kept policy rates unchanged in the initial months of 2026, which has contributed to broadly stable real long-term interest rates (Figure 1.31). This has been the case in the United States and the United Kingdom, where inflation is still above target, and in the euro area, Canada and Korea, with lower inflation rates. In contrast, policy rates have been increased three times in Australia and once in Norway, reflecting the need to address underlying inflation pressures. In Japan, where monetary accommodation continues to be gradually withdrawn, policy rate increases have paused. Amongst the large emerging-market economies, policy rates remain restrictive in Brazil and Türkiye, despite recent declines, whereas policy rates remain at low or moderate levels in China and India. Mexico has recently announced that the cycle of policy rate cuts started in 2024 has come to an end. Colombia has recorded the largest policy rate changes, with two 100 basis point increases to re‑anchor excessively high inflation expectations, with a more modest increase in Indonesia.

Central banks in both advanced and emerging-market economies need to remain vigilant and attentive to shifts in the balance of risks around economic and financial developments to ensure that underlying inflation pressures are durably contained. Temporarily higher headline inflation resulting from the energy price shock can be looked through provided inflation expectations remain well-anchored and second-round effects are expected to be mostly avoided. However, balancing the risks of persisting inflation against the downside risks of a significant growth slowdown and rise in unemployment may require an adjustment in policy rates, particularly for central banks with dual mandates. The prolonged disruption scenario would tilt this trade-off towards higher policy rates in the near term. Changes in global risk aversion and associated currency movements add to the need for careful calibration of monetary policy in emerging‑market economies. Central bank independence and accountability help to ensure that policymakers can respond quickly to changes in the balance of risks for price stability and lower the volatility and persistence of inflation.

Figure ‎1.31. Real long-term interest rates have remained high compared to pre-pandemic levels

Note: Based on data up to 27 May 2026. In Panel A, the real short-term interest rates are calculated using nominal one-year government bond yields and one year-ahead inflation expectations by consumers in the United States, the euro area and the United Kingdom, by corporates participating in the Tankan Survey in Japan, and by market professionals participating the Focus Survey in Brazil. In Panel B, the real long-term interest rates show 10-year inflation-linked bond yields.

Source: Banco Central do Brasil; Bank of Japan; European Central Bank; University of Michigan; YouGov/Citigroup; and OECD calculations.

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In the time-limited disruption scenario, diverse policy rate trajectories are expected across advanced economies (Figure 1.32, Panel A), though rate adjustments are generally projected to be small. Virtually all economies will either increase their policy rates or keep them unchanged in the remainder of 2026, with Australia, the euro area and Korea among the former and Canada, the United Kingdom and the United States among the latter. In contrast, many central banks in advanced economies are projected to cut policy rates in 2027 as energy price pressures decline, including the Bank of Korea and the European Central Bank (reversing increases in 2026), as well as the Bank of England, and the Reserve Bank of Australia. In Japan, the policy rate is projected to increase gradually from 0.75% at present to 2% by end-2027, as core inflation stabilises around 2% and the output gap closes. Central bank bond holdings are assumed to decline further in Australia, the euro area, Japan and the United Kingdom. For all advanced economies, real policy rates are projected to be close to or within estimated ranges for real neutral rates – the real interest rate at which the policy stance is neither accommodative nor restrictive – at the end of 2027, with inflation back or close to target at that time.

With few exceptions, the large emerging-market economies are projected to either decrease or keep unaltered their policy rates in the remainder of 2026-27 in the time-limited disruption scenario (Figure 1.32, Panel B), given the prevailing context of expected growth moderation and only temporary increases in inflation from the energy price shock. Policy rates are projected to remain unchanged in China at a low level to support activity. A small rate increase is anticipated in India in mid-2026, undone in early 2027, with rates remaining close to neutral levels. Mexico is expected to keep its rate unchanged. In contrast, substantial policy rate reductions are projected in Brazil and Türkiye as inflation moderates, leaving rates by end‑2027 still at restrictive levels.

Figure ‎1.32. Policy rates projections in the time-limited disruption scenario

Note: Panel A shows the midpoint of the federal funds target range for the United States and the deposit facility rate for the euro area.

Source: OECD Economic Outlook 119 database.

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Though estimates are surrounded by considerable uncertainty, some studies show a recent uptick in global neutral rates (Del Negro et al., 2026). One potential explanation is a decline in the convenience yield (i.e., lower investor appetite for the safety and liquidity of sovereign bonds) reflecting higher public debt and quantitative tightening (Schnabel, 2025a). Other possible drivers of higher neutral rates, whose impact may be brought forward by influencing expectations, are stronger productivity and investment, for instance as a result of widespread AI adoption (Rachel, 2025). On the other hand, higher oil prices, if they persist as in the prolonged disruption scenario, could put downward pressure on neutral rates through the decline in potential growth rates.

Strengthening the resilience of the banking sector and non‑bank financial intermediaries

Banks’ exposures to vulnerabilities in the real economy and their growing interconnectedness with non‑bank financial institutions (NBFIs) underscore the need to maintain adequate capital and liquidity buffers to absorb shocks. Enhanced stress‑testing frameworks are required to better assess the impact of rising corporate credit distress, potential sovereign risks (e.g. through haircuts or liquidity freezes), and possible spillovers arising from bank–NBFI interlinkages, including scenarios that explore the potential effects of long‑lasting disruptions in the Middle East (Acharya et al., 2024; IMF, 2026) or changes in AI valuations. Completing the full and consistent implementation of the Basel framework, alongside a more coordinated review of national prudential regulations, would enhance the effectiveness of international standards. Banking regulation could also be streamlined by rationalising global and domestic capital requirements, enhancing technology usage, and more proportionate regulation (with lighter compliance burdens on smaller institutions (Hernández de Cos, 2026).

As NBFIs become more leveraged and increasingly interconnected with banks, supervisors’ ability to identify systemic risks and mitigate contagion requires more timely and comprehensive reporting to close data gaps, enhanced cross‑jurisdictional data‑sharing, and closer scrutiny of liquidity and leverage vulnerabilities, particularly in investment funds (FSB, 2025). Identification of systemically important and highly interconnected NBFIs could also facilitate development of entity-specific regulatory and supervisory requirements, and thereby strengthen financial stability. In the private credit sector, recent write-downs highlight the need for stronger lending standards, enhanced transparency, and timely loss recognition to reduce self‑reinforcing redemption pressures (Cera et al., 2026; IMF, 2026). Securities regulators should ensure that effective liquidity risk management tools are in place for investment funds, particularly open‑ended funds, to help minimise the risk of investor runs and abrupt deleveraging (IOSCO, 2025).

Challenges to fiscal sustainability are increasing

In the time-limited disruption scenario, the fiscal stance is expected to be slightly expansionary in the typical OECD advanced economy in 2026, based on the -0.2% of GDP projected median change in underlying primary balances (one indicator of the structural fiscal position), although not all economies are undertaking some fiscal easing. A large majority of advanced economies are planning some fiscal tightening in 2027, partly reflecting the withdrawal of energy support measures, with a projected median improvement of 0.4% of potential GDP in underlying primary balances. This will not prevent a further rise in the OECD aggregate debt-to-GDP ratio, which is projected to increase by over 2 percentage points from 2025 to 2027 to 113% of GDP (Figure 1.33). The fiscal projections for 2026-27 for advanced and emerging market economies (discussed below) are conditional on announced government measures and OECD assessments of current plans (Annex 1.A).

The fiscal stance is projected to remain broadly neutral over 2026-27 in the United States, with the headline budget deficit widening somewhat to 7.7% of GDP as excess capacity increases. Modest fiscal consolidation is expected in the euro area as a whole, with fiscal tightening in France, Italy and Spain offsetting fiscal expansion in Germany that is partly defence-related. Japan’s structural primary deficit will widen with fiscal stimulus this year, including income tax reforms and new energy subsidies, followed by projected fiscal consolidation in 2027, assuming no additional supplementary budgets. Sizeable consolidation is also projected in Australia and the United Kingdom over 2026-27. In contrast, a mild fiscal expansion is expected in Canada.

For emerging market economies as a group, progress in curbing budget deficits is projected to halt temporarily in 2026 in the time-limited disruption scenario, with larger deficits expected in many countries. In China, funds carried over from the previous year will lead to more spending and development banks will provide quasi-fiscal support. Fuel subsidies and, in some countries, lower excise taxes, are expected to push up fiscal deficits in Brazil, Indonesia and Türkiye. Spending restraint will make Mexico an exception. In 2027, as growth gathers pace and energy-related support measures are phased out, fiscal balances are expected to improve in most emerging-market economies, but improvements will generally be modest, often below 0.5% of GDP. Little change is projected in China. Open-ended cuts to petrol duties and higher interest payments are expected to further widen the budget deficit in Türkiye. As in advanced economies, the debt ratios of emerging markets are often projected to remain on an upward trend in 2026‑27 (Figure 1.33).

Figure ‎1.33. Government debt ratios are projected to increase further in many countries

Change in the ratio of general government gross financial liabilities to GDP, 2025–2027

Note: The chart is based on central government gross financial liabilities for Chile, Colombia, Costa Rica, Malaysia, and Thailand and on broader government definitions (often general government) for the other economies. For emerging markets, gross liabilities are often not comparable across countries as different concepts are applied. Data for India refer to fiscal years.

Source: OECD Economic Outlook 119 database; and OECD calculations.

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In both advanced and emerging market economies, recent developments and short-term prospects compound long-standing fiscal challenges. Rising bond yields put upward pressure on debt service costs, especially where refinancing needs are large,9 while widespread emergency support measures for energy users are weighing on primary revenue and driving up expenditure (OECD, 2026d and Chapter 2). The marked change in the mix of investors purchasing government bonds since the pandemic, with the shift from central banks to private investors such as hedge funds and investment funds, may mean that yields have to be more elevated to sustain demand for government debt in the future and that risks have risen of potential financing shocks from sharp changes in investor sentiment (OECD, 2025a; OECD, 2026c).

Actions are needed to address long-term fiscal pressures

Fiscal balances in the time-limited disruption scenario often fall short of what would be needed for stabilising debt ratios (Figure 1.34), and, in the absence of corrective action, face further deterioration from rising defence expenditure, ageing populations and measures to accelerate decarbonisation and address extreme weather events. Emerging-market economies are generally less exposed to military spending pressures and to the ageing-induced drag on potential growth (Guillemette, 2025) but face additional expenditure challenges from the need to upgrade infrastructure and strengthen social safety nets. These fiscal challenges are compounded in the prolonged disruption scenario, given the severe slowdown in the global economy, particularly for net energy importing countries.

Figure ‎1.34. Many countries need stronger fiscal balances to stabilise public debt in the near term

Difference between debt-stabilising and projected primary fiscal balance, 2027

Note: The debt‑stabilising primary fiscal balance is the primary balance consistent with an unchanged debt‑to‑GDP ratio from 2026 to 2027, given otherwise unchanged projections for 2027. Due to data limitations, computations refer to overall balances for Brazil, Chile, Colombia, Costa Rica, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Thailand, and Viet Nam. The chart is based on central government definitions for Chile, Colombia, Costa Rica, Malaysia, and Thailand and on broader government definitions (often general government) for the other economies. For emerging markets, balances are often not comparable across countries as different concepts are applied. Data for India refer to fiscal years.

Source: OECD Economic Outlook 119 database; and OECD calculations.

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Many governments have already implemented support measures for households and firms to mitigate the impact of higher energy costs (OECD 2026 and Chapter 2). Such discretionary measures should be well‑targeted on the households most in need and viable firms, preserve incentives to reduce energy use and have clear sunset mechanisms, allowing prompt withdrawal as energy prices subside. So far, various forms of price relief, such as lower taxes on energy and regulated or capped energy prices, have been the most common intervention. Though easy to implement in a timely way, these measures are poorly targeted and often weaken incentives to save energy and diversify energy sources. The likelihood of high ensuing fiscal costs is already weighing, albeit only temporarily, on the budget projections for some advanced and emerging market economies. Support to shield farmers from high fertiliser prices (Box 1.4) further adds to the fiscal impacts of the Middle East conflict. In the medium run, policy action to foster decarbonisation, such as by lowering reliance on fossil fuels and promoting energy efficiency, will also reduce exposure to oil and gas price shocks.

Military spending is rising rapidly in many countries, including NATO members committed to allocating the equivalent of 3.5% of GDP to core defence requirements by 2035 (Chapter 3). The primary goal is to shore up national security rather than boost growth, but many countries should expect a modest near‑term lift in economic activity from higher defence expenditure. Output gains could be larger in economies with ample capacity to absorb the added demand, particularly if public debt is low and monetary policy accommodates the fiscal stimulus. The longer-term economic effects of defence spending are more uncertain. Some crowding out of private activity is likely over time as resource constraints bind. Higher taxes or compensating cuts to non-defence spending could also negate any lasting benefits from larger defence budgets. Thorough cost assessments should inform decision making, particularly with respect to large‑scale defence programmes (Tryggvadottir and Bambalaite, 2026). Effective procurement will also be essential to limit the costs of rearmament and ensure timely capability upgrades. Cooperating with other countries on common purchases can improve value for money while enlarging markets for highly productive defence firms (Conigrave and Shin, 2026).

To ensure longer-term debt sustainability and create policy space to respond to future shocks, countries need to design and implement more ambitious fiscal adjustment efforts. The pace and composition of such measures will depend on the specific circumstances of each economy and should seek to preserve and foster growth potential, on which debt reduction ultimately depends (Pina et al., 2025). Containing and reallocating public spending, notably by improving public sector efficiency, should be done in a way that promotes physical and human capital formation and preserves social support to those in need. Increasing retirement ages in line with gains in life expectancy, coupled with measures to support the employment of older workers, should be a priority is many economies. In emerging‑market economies, there is scope to further reduce distortive and environmentally-harmful subsidies and improve the targeting of social benefits by making better use of household and social registries.

Increasing tax revenues, either by broadening tax bases or by raising rates, may also be needed where receipts can be collected in a way that limits distortions to work incentives and economic activity. In many economies there is scope for base broadening in the taxation of consumption and capital. Efforts to curb informality and tax evasion, especially important in emerging economies, will also yield broader tax bases. Fiscal adjustments that need to be sustained over several years should be underpinned by strengthened fiscal institutions to enhance the credibility of medium-term adjustment paths. Independent fiscal institutions have an important role to play in this regard. In emerging-market economies greater use of fiscal rules would help support countercyclical fiscal policy, which is associated with improved macroeconomic and financial sector stability, higher private investment and lower external vulnerabilities (World Bank, 2026).

The prolonged disruption scenario entails considerable policy challenges

The prolonged disruption scenario generates significant policy challenges, with many economies either in or close to recessions and inflation being pushed up further. Larger and more persistent energy price increases make it much harder for central banks to look through the shock given the risks of inflation expectations becoming de-anchored. Food prices, a high-visibility component of household consumption baskets, are also higher, and increased energy prices will filter through to many core inflation items through channels such as higher transport costs and more expensive specialised inputs into industrial processes. As the risk of de‑anchoring of inflation expectations builds up, many central banks are likely to have to react and raise policy rates, though such increases need to be carefully calibrated to avoid amplifying the downturn. Substantial risk repricing in global financial markets also further increases pressures for monetary policy tightening in emerging-market economies.

If pressures in global US dollar funding develop, enhanced use may need to be made of the existing swap lines between six major central banks by extending the maturity, increasing the frequency and lowering the price of operations.10 Many countries can also draw on bilateral currency swap lines with the Federal Reserve, the European Central Bank, and the People’s Bank of China. The national measures to support liquidity in the financial sector and to boost bank lending to businesses and households seen during the pandemic could also be reintroduced in the event of a severe tightening of conditions in financial markets.

Plans for further reduction of sovereign bond holdings by central banks may also need to be reconsidered, with the more challenging environment weighing on the trade-offs behind the appropriate size of central bank balance sheets (Box 1.5). In the event of a severe tightening of market conditions, central banks could also consider a fresh expansion of their balance sheets, either through quantitative easing or, as in the euro area, renewed longer-term refinancing operations. This would reduce possible upward pressure on long term interest rates, tilting the yield curve and mitigating increases in borrowing costs, and thus support to activity. However, such actions could also raise considerable communication challenges if they occurred at a point at which central banks were still increasing policy interest rates.

With monetary policy focused on stabilising inflation expectations in the prolonged downturn scenario, at least initially, there is a greater economic rationale for expansionary fiscal policy to help stabilise output. The automatic budgetary stabilisers provide a first line of defence and should be allowed to operate. However, their ability to cushion activity in the short run could be hampered by the nature of the shocks. The combination of higher inflation and weak growth tends to increase revenue from indirect taxes relative to direct taxes on incomes, and many categories of government spending are set in advance in nominal terms. In addition, the automatic stabilisers by themselves will not foster the relative price adjustment and demand reallocation required given energy scarcity.

The scope for new discretionary fiscal stimulus measures varies across countries and largely depends on the need to preserve financial market access at affordable, if nonetheless higher, interest rates. In countries with low or moderate debt levels, additional debt-financed stimulus measures could be introduced, although care would be needed to ensure that they helped to reduce energy intensity instead of simply intensifying shortages of energy and other critical inputs or adding to inflationary pressures. Options include taking steps to reduce energy consumption in the short run, such as support for telework, and lowering prices and increasing the supply of public transportation. Over time, increased public investment would help to foster energy supply diversification and energy efficiency, as would tax allowances to incentivise private investment for those goals.11 As highlighted further below, policies that promote energy diversification and efficiency become more urgent under a prolonged disruption scenario. Countries lacking fiscal space or with limited access to financial markets - a constraint more likely to bind among emerging-market and developing economies - would need to ensure that any new support measures would be at least partly funded through expenditure reduction elsewhere or revenue increases. Some aggregate demand stimulus could nonetheless be achieved via a balanced budget multiplier framework. In this context, offsetting revenue increases with low short-run multipliers and limited negative effects on growth potential, such as some forms of capital taxation, could be considered.

The prolonged disruption scenario would make it essential that measures to mitigate the impact of higher energy prices on households and companies are well targeted and of a non-distortive, lump-sum nature. Top‑up payments to existing welfare recipients are easy to implement and a valid starting point for targeting, which can then be improved by taking on board other relevant factors (such as energy needs or geographical location) so that no vulnerable households are missed (OECD, 2026d). Most discretionary interventions adopted so far (such as untargeted energy price support that often lowers marginal prices) would become increasingly costly and of limited effectiveness with a prolonged disruption to energy markets. A failure to implement support measures that provide incentives to save energy would exacerbate the impact of shortages and of the negative terms of trade shock.

Amid tighter financial conditions and larger borrowing needs, governments also need to take steps to minimise tensions in sovereign debt markets. The importance of credible medium-term budget adjustment paths underpinned by sound institutional arrangements would increase. In the euro area, a move towards common borrowing to finance investment with cross-border spillovers (Bakker et al., 2024) would reduce risks of financial fragmentation while contributing to expand the supply of euro-denominated safe assets.

Box ‎1.5. How large should central bank balance sheets be?

The value of total assets and liabilities of many central banks in advanced economies has varied widely since the global financial crisis (Figure 1.35). Quantitative easing (QE), the large-scale purchase of securities (mainly government bonds), led to a significant increase in the size of the balance sheets of the Federal Reserve and the Bank of England from 2009, and of other central banks, such as the European Central Bank (ECB), some years later. During the pandemic, these and other central banks resorted again to QE to support economic activity and to address strains in financial markets, expanding their balance sheets further. As conditions stabilised, they began quantitative tightening (QT), the downsizing of bond holdings, in 2022-23 (as the Federal Reserve had already done in 2017-19). In several economies the size of balance sheets relative to GDP has now already returned, or come close, to pre-pandemic levels. Against this background some central banks have brought QT to a halt while others are still pursuing it, raising questions about the appropriate steady state size of central bank balance sheets.

Figure ‎1.35. Quantitative easing and quantitative tightening have been the main drivers of changes in central bank balance sheet size

Note: Only major components of the central bank balance sheets are shown. Assets are displayed as positive and liabilities as negative. For the euro area, reserves include the amount of deposit facility, and LTROs (longer-term refinancing operations) include TLTROs (targeted longer-term refinancing operations) and PELTROs (pandemic emergency longer-term refinancing operations). For the United Kingdom, securities are proxied by loans from the Bank of England to the Asset Purchase Facility.

Source: OECD Economic Outlook 119 database; Bank of Canada; Bank of England; Bank of Japan; Board of Governors of the Federal Reserve System; European Central Bank; Reserve Bank of Australia; and OECD calculations.

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The balance sheet of the central banks which conducted QE is mainly composed of reserves on the liability side and government bonds on the asset side. Thus, the decision about the appropriate balance sheet size essentially depends on an assessment of the trade-offs that arise as reserves and bond holdings increase or decrease. These trade-offs can evolve over time, depending on the wider economic situation and on financial market conditions. Duygan-Bump et al. (2026) argue that there is actually a central bank trilemma, since only two of the following three objectives can be achieved simultaneously: a small balance sheet, low volatility of short-term interest rates, and limited market intervention.

The case for a smaller balance sheet is often made on the asset side. Lower central bank government bond holdings can reduce price distortions in sovereign debt markets, leading to a more efficient allocation of resources. From a monetary policy standpoint, large holdings of government bonds may constrain, or be perceived to constrain, monetary policy due to the risk of fiscal dominance, complicating central bank communication (Logan et al., 2026). Lower steady state bond holdings also preserve policy space to reintroduce QE as a response to future crises, if needed (Anderson et al., 2026).

However, it is far from certain that central banks can step back from bond market intervention, particularly in the current context of large budget deficits and substantial debt issuance. Any reduction in central bank holdings requires greater public debt absorption by private sector investors, which tend to be more price‑sensitive and are sometimes highly leveraged. This entails the risk of higher yields and greater volatility in sovereign bond markets (Ando et al., 2026; OECD, 2026c). In the event of serious bond market volatility, central banks could need to enhance securities purchases to help preserve financial stability. In a currency union, tensions in sovereign debt markets could also lead to financial fragmentation, threatening the smooth and effective transmission of monetary policy across the whole area (Cipollone, 2025).1

Important policy trade-offs also apply to the liability side of central bank balance sheets. From the perspective of the private sector, reserves are safe and liquid assets and they serve as an essential means of settlement. Although a reduction in the amount of reserves could lead to better functioning of money markets, with a pickup in trading volumes, there is a risk that, at certain junctures, liquidity shortages in money markets lead to increased interest rate volatility, forcing the central bank to intervene. Events in September 2019 in the United States are an example, when the repo rate spiked sharply amid ongoing QT at the same time as high tax payments and Treasury settlements.2

Estimating the demand for reserves to ensure that balance sheet reductions do not lead to liquidity stress is difficult. There is a broad consensus that demand for reserves has increased over the past two decades, partly due to changes in financial regulation (Anderson et al., 2026; BIS, 2025; Duffie, 2026).3 In addition, financial institutions can be reluctant to utilise a central bank liquidity backstop for reputational reasons, inducing them to hold more reserves as a buffer (Anderson et al., 2026; Logan et al., 2026; Nelson et al., 2026). More broadly, the demand for reserves varies according to the reserves regime. In a regime in which central banks seek to control short-term interest rates by remunerating reserves while supplying ample liquidity to the market (an ample reserves regime) the demand for reserves is higher (Borio et al. 2024), in contrast to the regime of scarce reserves prior to the global financial crisis.

In this context, a range of options has been recently proposed in the United States to reduce the demand for reserves under an ample reserves regime and thus further shrink the central bank balance sheet. These options, many of which require considerable preparatory work, include a firm commitment to conducting liquidity-providing operations when demand rises temporarily, while taking steps to mitigate perceived reputational risks from the use of liquidity backstops. Other possible options are reviewing the regulatory framework for intraday liquidity management, applying tiering to reserves to incentivise financial institutions to provide more funds into money markets and redesigning the payments system to make a more efficient use of reserves (Anderson et al., 2026; Duffie, 2026; Logan et al., 2026).

A smaller balance sheet would also reduce the volatility of public debt cost, although such an objective could also be achieved by tilting central bank bond holdings towards shorter-term securities (Schnabel, 2025b). Public debt cost depends on both bond holdings and reserves. QE effectively shortened the average maturity of public debt in the consolidated balance sheet of the general government and the central bank, replacing long-term fixed-rate bonds by short-term floating-rate reserves (OECD, 2023b). This increased the speed of transmission of changes in policy rates to public debt costs, making the latter more volatile. Very low policy rates in QE years reduced effective debt costs via higher central bank profits, transferred to the Treasury as dividends. Conversely, higher policy rates in recent years made reserve remuneration costs soar, inducing central bank losses.

1. In this regard, the ECB created in 2022 the Transmission Protection Instrument (TPI), which allows the Eurosystem to purchase government bonds of eligible countries in the event of disorderly market dynamics.

2. Structural features of the repo market, such as concentration of liquidity suppliers, also amplified the rate increase (BIS, 2019).

3. Although reserves are categorised as Level 1 high-quality liquid assets, the same asset class as domestic government bonds, for the purposes of the Basel III Liquidity Coverage Ratio (LCR) reserves tend to be regarded as more liquid assets in assessments of the monetisation capacity of asset holdings under stress scenarios.

Diversification of energy supply and better energy efficiency are needed to improve energy security

Governments can do more to lower the vulnerability of their economies to future geopolitical shocks. Recent events highlight the continuing exposure of economies to global energy disruptions, even if the intensity of fossil fuel use has declined steadily since the mid-1970s. In the short-term, the priority is effective crisis management, including the use of strategic energy stocks, activating emergency-demand restraint measures, and providing timely, targeted income support that preserves energy-saving incentives. In the longer‑term, reducing reliance on foreign sources of fossil fuels and improving energy efficiency in the domestic economy are key priorities, and more pressing the longer the current disruption to global energy markets persists.

As discussed in Chapter 2, greater diversification of energy supply remains a first line of defence against future external shocks. Through diversification, the system becomes less vulnerable to any single point of failure — whether driven by geopolitical disruptions, extreme weather, or cyberattacks. Reducing the share of fossil fuel imports in the domestic energy mix can lower exposure to international geopolitical risks and is a particular priority for large net energy importers. Further introducing policy measures that promote low‑cost domestic clean energy sources, such as renewable energy technologies, can both reduce fossil fuel imports and help governments achieve their carbon mitigation objectives. Price based and non-price-based policy approaches that tackle both barriers on the demand and supply side should be considered, depending on national circumstances and preferences. Any increase in the share of renewable energy sources will need to be accompanied by increased electrification, requiring greater investment in new electricity grids and storage. However, spending on grids has generally lagged what is needed to accommodate the expansion in new electricity generation, increasing congestion, delaying the connection of new generation sources and pushing up electricity prices (IEA, 2025). Further accelerating permitting of grid projects and reducing barriers to businesses obtaining transformers and other key components can enable further electrification and a greater role for domestic sources in countries’ energy supply.

Policies that promote greater energy efficiency in the household and industrial sectors can also help reduce reliance on fossil fuel imports and safeguard economies against future energy crises. Increasing regulatory energy efficiency standards are an important element, including those related to building, vehicle, appliances and industrial equipment. Such measures can be complemented with information campaigns and financial incentives for lower income households to help offset the high upfront costs of necessary actions. However, adoption of these policies remains uneven across countries (see Chapter 2), highlighting scope for further reform efforts.

In all regions, the spillovers from future conflicts can also be cushioned by strong inventory management and emergency preparedness. Global resilience to supply shocks could benefit from a coordinated build-up of inventories over the long-term, outside of periods of market stress. The work of the International Energy Agency in helping to co-ordinate oil reserves and collective responses to major disruptions in energy markets will remain vital.

Structural reforms are needed to improve growth prospects and resilience

The current conflict also underscores the importance of structural reforms that enhance the ability for economies to adapt when faced with structural and external shocks. Diversification of energy supply will entail significant structural change, as economic activities are made more energy efficient and domestic energy systems are further reshaped, a process influenced by a range of structural policies (Chapter 2). Enhanced reforms efforts in key areas will also help to determine the extent to which countries can more fully capitalise on the opportunities offered by burgeoning investment in AI technologies, and reduce fiscal pressures.

Structural challenges have been evident in OECD economies for some time. Notwithstanding the recent cyclical improvement, productivity growth in the average OECD economy has slowed since the global financial crisis (Figure 1.36, Panel A). This partly reflects weakening business dynamism and human capital accumulation across OECD economies (Chapter 2). The share of the working age population has also begun to decline in OECD economies (Figure 1.36, Panel B), creating additional challenges for policymakers. Despite these challenges, reform momentum has been in retreat across the OECD for more than a decade.

The new OECD Foundations for Growth and Competitiveness Initiative (covering 48 countries including all 38 OECD member countries) highlights the need for policymakers to consider multiple interlinked policy areas to revive the structural drivers of economic growth:

• Key enabling conditions for growth need to be in place, including high-quality human capital, sound institutions, effective governance, reliable infrastructure, affordable and secure energy supply and a strong quality of regulations.

• Policymakers also need to ensure that market incentives are in place that encourage firms and households to channel resources to their most productive uses. Business incentives and market dynamism can be sharpened by strengthening competition in product markets, including through lower administrative burdens to firm entry and simplifying insolvency regimes. In the same vein, reducing barriers to labour mobility and participation and improving skills can promote a more efficient allocation of resources. Well-designed tax-benefit systems and activation policies are needed to strengthen work incentives, alongside good access to affordable childcare and housing policies that promote mobility.

• With the enabling conditions for growth established and policies providing adequate market incentives set, governments can consider strategically steering economic activity toward priority areas. Targeted reforms that promote innovation, green investments and energy security help address market failures, accelerate technological transitions, and align growth with long‑term societal objectives, while strengthening competitiveness and economic resilience.

Figure ‎1.36. Productivity growth has slowed and the share of the working age population has started to decline

Source: OECD Economic Outlook 119 database; OECD Long‑Term Economic Outlook 118 database; and OECD calculations.

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While each country’s situation is unique, the country specific reform recommendations from the country notes in the OECD Foundations for Growth and Competitiveness publication highlight the broad range of reforms required (Figure 1.37). In summary:

• Reforms to product market regulations and insolvency policies comprise 18% of the policy recommendations. These include measures that simplify permits, licenses and administrative procedures, including in Australia, Indonesia, India, Peru, Sweden and the United States. Reducing regulatory burdens in professional services is also emphasised, including in Canada, France, Italy, Korea and Türkiye. In addition, reforms that streamline insolvency procedures and strengthen restructuring tools are recommended in many economies, including Belgium, Israel, Norway, Poland and South Africa.

• Education, skills and human capital policy reforms also comprise 18% of the policy recommendations. This includes expanding lifelong and adult learning opportunities in countries such as Costa Rica, Croatia, Germany, Denmark, Spain and the Slovak Republic. At younger ages, providing additional support to disadvantaged schools and at-risk students are emphasised, including in Brazil, China, France, Mexico and the United Kingdom. Further expansion of vocational education and apprenticeship systems is also recommended for many countries, including Italy, Latvia, Lithuania, Peru and Romania.

• Reforms that promote labour mobility and participation account for around 12% of the policy recommendations. This includes efforts to expand access to childhood and elderly care as well as primary school education, with such recommendations relevant for Ireland, the Netherlands, Portugal, the United Kingdom and the United States. Reforms that reduce the tax wedge are recommended for other countries, including Spain, Italy, Mexico and Türkiye, while increased spending and efficiency of active labour market policies is also emphasised, such as in Austria, Czechia, France and Greece. Furthermore, labour market participation can be supported by changes to parental leave policies, including in Costa Rica, Italy, the Slovak Republic and the United States.

• The need for further improvements to governance and institutions is cited in 11% of the policy recommendations. One key aspect is expanding the use of digital tools to modernise the public sector, including in Chile, India, Iceland, Latvia and New Zealand. Reforms to improve public procurement are also recommended, including in Argentina, Bulgaria, Finland and South Africa, and the need to introduce or improve ex ante regulatory impact assessments, including in Colombia, Denmark and Portugal. Improved legislation against corruption was also highlighted for a number of countries, including Bulgaria, China, Peru and the United Kingdom.

• Policy changes that improve the efficiency of the tax system account for 11% of the policy recommendations. Broadening the tax base and reducing tax expenditures are recommended in many countries, including Canada, France, Ireland, Sweden and South Africa. Efforts to reform property taxation, in some cases by shifting the tax burden to property away from direct taxes, are also emphasised, including in Australia, Denmark, Norway and Slovenia.

• Further investment in physical infrastructure is urged in 8% of the policy recommendations, including in energy infrastructure in Belgium, Estonia, Indonesia, India and Mexico. A need to strengthen strategic planning, clarity, transparency and accountability is also emphasised, including in Costa Rica, Germany, Hungary, Japan and the United Kingdom.

• Improvements to innovation policy are highlighted in 7% of the recommendations, including the need to evaluate and reform R&D tax credits in Chile, Japan, Lithuania and Poland, and greater public R&D spending, including in Finland, Luxembourg, Slovak Republic and the United States.

• The need to promote rules-based open markets and openness to FDI is emphasised in 6% of policy recommendations. This most commonly relates to the need to improve trade facilitation, including in Brazil, India, Israel and Peru. Reducing barriers to FDI is also recommended in a number of countries, including Canada, Iceland, Japan and New Zealand.

• Measures that encourage the acceleration of digital adoption comprise 3% of policy recommendations. This most commonly reflects a need to promote the adoption of digital tools, including in Australia, France, New Zealand and Romania, but there is also a need to boost investment in digital infrastructure in some economies, including Greece, India, Ireland, Peru and the Slovak Republic.

• Further measures to raise investment in energy and natural capital account for 3% of policy recommendations. This mostly reflects a need to strengthen emission regulation and climate resilience standards, including in Australia, Chile, Korea, Spain and South Africa.

• Housing policy reforms are emphasised in a handful of countries. This includes improvements to housing-related regulation, including in Canada, Luxembourg, the Netherlands and the United States, and expanding funding for social housing in Australia, Canada, Israel, Portugal and Sweden.

Figure ‎1.37. Reform recommendations to strengthen the foundations for growth and competitiveness

Share of policy recommendations, per cent

Note: Each bar displays the share corresponding to the number of countries with a recommendation in that area based on a whole sample of 48 countries.

Source: OECD calculations based on Foundations for Growth and Competitiveness Country Notes.

Statlink

Countries should focus on long-term trade diversification rather than harmful export bans

A lasting resolution to trade tensions would strengthen economic growth prospects. Governments need to work together, bilaterally and multilaterally, to find the best possible ways to make international trading arrangements fairer, and function better, preserving the economic benefits of open markets and rules-based global trade. Steps to lower tariffs and non-tariff barriers, deepen trade agreements or reduce barriers to trade in services could significantly improve living standards.

Countries should avoid introducing export restrictions in response to global supply risks stemming from the conflict in the Middle East. Export bans for agricultural products tend to exacerbate price increases and particularly harm smaller, and poorer import dependent countries – with a negative impact on global food security in the short term and supply capacity over the long term (OECD, 2023; OECD/FAO 2023). Prior to the onset of the conflict, the WTO had estimated that global food and agricultural products subject to export restrictions had fallen to around USD 7 billion in 2025, from almost USD 12 billion in 2024 (WTO, 2025).

The conflict has also resulted in export bans on products such as sulphuric acid and phosphates as countries face prospective shortages in supply from the Middle East. Export restrictions for critical minerals are becoming both increasingly prevalent and more prohibitive, which raises the chances of significant negative spillover effects (OECD, 2026e). Continued use of export bans for industrial policy use, as has been the increasing case for critical raw materials, can induce domestic under-investment and wasteful use. Rather than export bans, over the long term, countries need to make further efforts to reduce critical dependencies by developing alternative technologies to better ensure resilience and encourage diversification of suppliers and buyers.

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Annex 1.A. Policy and other assumptions underlying the projections in the time-limited disruption scenario

Fiscal policy settings for 2026-27 are based as closely as possible on legislated tax and spending provisions and are consistent with the growth, inflation and wage projections. Where government plans have been announced but not legislated, they are incorporated if it is deemed clear that they will be implemented in a shape close to that announced. It is assumed that EU countries generally adopt fiscal policy adjustments which are consistent with the reformed Stability and Growth Pact, apart from those member states where planned higher net expenditure has required, or is expected to require, the activation of national escape clauses.

Projections for the EU countries account for spending financed by the NextGenerationEU (NGEU) grants and loans, based on expert judgments about the distribution of spending across years and different expenditure categories and informed by officially announced plans where available. NGEU grants are assumed to be received and spent by end-2026 at the latest and to be budget balance‑neutral, increasing both capital tax and transfers receipts and government expenditure by the same amount. In addition, positive net one-offs are added in order to reflect the discretionary stimulus associated with those grants, as measured by changes in underlying primary balances.

For monetary policy, the assumed path of policy interest rates and unconventional measures represents the most likely outcome, conditional upon the OECD projections of activity and inflation. This may differ from the stated path of the monetary authorities. In the euro area, 10-year sovereign spreads relative to Germany are assumed to remain constant over the projection period at levels close to those observed in the first half of May.

The time-limited disruption scenario projections assume unchanged exchange rates from those prevailing on 8 May 2026: one US dollar equals JPY 156.8, EUR 0.85 (or equivalently one euro equals USD 1.18) and 6.8 renminbi.

In the time-limited disruption scenario projections, the price of a barrel of Brent crude oil expressed in USD per barrel is assumed to move in line with the futures price as of 26 May, with a decline from USD 101.8 in 2026Q2 to USD 77.5 in 2027Q4. The TTF natural gas price expressed in EUR / MWh is assumed to move in line with the futures price as of 26 May, declining from EUR 46.3 in 2026Q2 to EUR 34.2 in 2027Q4. Global food commodity prices are assumed to evolve based on available product-specific futures curves as at 26 May, rising by 8.0% in 2026 and 3.6% in 2027. Other commodity prices are assumed to be constant over the projection period at their average levels from April 2026.

The cut-off date for information used in the projections is 27 May 2026.

OECD quarterly projections are on a seasonal and working‑day‑adjusted basis for selected key variables. This implies that differences between adjusted and unadjusted annual data may occur, though these in general are quite small. In some countries, official projections of annual figures do not include working-day adjustments. Even when official projections do adjust for working days, the size of the adjustment may in some cases differ from that used by the OECD.

Notes

← 1.  A framework agreement was also concluded with Switzerland.

← 2.  Tariffs of 100% will be imposed on branded pharmaceutical products from companies that have not secured pricing agreements with the US administration, compared to 25% tariffs on branded products from companies that have pricing agreements. Generic drugs have been exempted from tariff increases. Framework agreement partners will benefit from lower rates.

← 3.  In the United Kingdom, the average rate on a two-year fixed mortgage with a 75% loan-to-value ratio rose to 5.14% at end-April, from 3.97% at end-February 2026. In Germany, short- and long-term mortgage rates increased to 2.85% and 3.38%, respectively, in end-May 2026, up from 2.2% and 3.0% at end-February. In the United States, the 30-year mortgage rate rose to 6.65%, from 6.1% over the same period.

← 4.  The “Magnificent Seven” refers to seven large US technology companies: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

← 5.  The AI investment boom is creating pockets of concentration in commercial real estate, with the value of private data centre construction in the United States rising steadily and equalling that of office construction in December 2025.

← 6.  The value of assets managed by private equity and private credit funds comprises both invested assets and uninvested committed capital (dry powder). In 2025, the global private capital market amounted to around USD 22 trillion, comprising private equity and private credit as well as venture capital, private infrastructure funds, and private real estate funds.

← 7.  US private credit lenders primarily consist of private credit funds and business development companies (BDCs). Regulated by the Securities and Exchange Commission, BDCs are closed-end or publicly traded investment companies that raise funds in public markets to provide financing to small and mid-sized domestic firms that may have limited access to traditional bank credit. BDCs must invest at least 70% of their assets in US companies valued under USD 250 million.

← 8.  In the United States, pension funds, insurers and other investment funds accounted for around USD 550 billion of equity holdings in private credit funds in 2024, plus about USD 170 billion in commitments to provide additional capital (in both cases, over half of the total). In addition, banks and non‑banks had in 2024 an estimated lending exposure of USD 410 to 540 billion to private credit funds.

← 9.  This is often the case in emerging markets, but also increasingly so in advanced economies, where debt issuance has been shifting towards shorter maturities (OECD, 2026c).

← 10.  The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank.

← 11.  In highly integrated economies, such as those in the EU, the cross-border benefits of investment can be substantial, both from macroeconomic and structural perspectives (for instance, more integrated energy markets (OECD, 2025b)