As the U.S.–Israeli confrontation with Iran nears the end of its second month, a report by the Organization for Economic Co-operation and Development (OECD) highlights acute uncertainty over global economic prospects, coinciding with escalating geopolitical tensions in the Middle East.
As Iran resists the demands of U.S. President Donald Trump, and reciprocal strikes between U.S. and Iranian forces continue -causing extensive damage to critical Iranian infrastructure and significant economic losses across Gulf states- the conflict has triggered a halt in commercial shipping through the Strait of Hormuz, along with the shutdown and disruption of key energy infrastructure.
As a result, most countries worldwide are experiencing sharp increases in energy prices and major disruptions in global supply chains- not only for energy, but also for essential commodities such as fertilizers.
The OECD report, which focuses on “resilience under stress,” emphasizes that the negative effects of the Middle East conflict are unlikely to remain confined to directly affected countries. Instead, they are spreading across the global economy through trade and energy channels.
At the same time, the sudden surge in energy prices is generating broad inflationary pressures, increasing production costs, and disrupting global supply chains - underscoring the structural fragility of the current international economic system in the face of major geopolitical shocks.
The report highlights increasing volatility in global financial markets, particularly in some Asian economies, alongside tightening financial conditions, even as they remain relatively supportive in both advanced and emerging economies.
This tension reflects the sensitivity of markets to disruptions in energy and trade flows, confirming that financial stability remains fragile.
Heightened uncertainty is also pushing investors to reassess risks, potentially leading to greater volatility in capital flows. This dynamic suggests that global financial conditions are becoming increasingly influenced by geopolitical factors, rather than traditional economic indicators alone.
To address these challenges, the report stresses the need for cautious and balanced economic policies. Central banks must maintain stable inflation expectations, while governments should provide targeted support to households and businesses, without undermining incentives to reduce energy consumption.
Limited fiscal space also necessitates improving spending efficiency and enhancing revenues to ensure debt sustainability. In addition, the report underscores the importance of strong financial oversight, avoiding new trade restrictions, and improving energy efficiency to reduce reliance on imported fossil fuels and strengthen resilience to future shocks.
Prior to the escalation of the conflict, the global economy had demonstrated notable resilience, supported by investments in artificial intelligence, increased productivity, and accommodative fiscal and monetary policies.
These factors helped sustain growth momentum despite earlier challenges, reflecting the growing role of technology -particularly AI investments- as a key driver of economic activity. At the same time, supportive economic policies boosted confidence and demand, helping to mitigate previous shocks.
However, the OECD report notes that the outlook for the Middle East conflict “remains uncertain in both scope and duration.” Prolonged increases in energy prices are expected to significantly raise business costs and consumer inflation, negatively affecting economic growth across countries depending on their specific conditions.
Rising production costs are squeezing profit margins, while inflation is eroding purchasing power. As demand weakens under these pressures, the global economy may enter a period of slowdown, highlighting the strong interdependence between energy prices and overall economic activity.
The OECD projects that global GDP growth will slow to 2.9% in 2026, then rise to 3.0% in 2027. Energy price shocks and conflict-related uncertainty are driving up costs and reducing demand, offsetting the positive effects of technological investment and lower tariffs.
These projections assume a gradual easing of energy market disruptions starting in mid-2026, reflecting a delicate balance between growth-supporting and constraining factors, leaving the global economic trajectory highly sensitive to geopolitical developments.
Among major economies, U.S. growth is expected to slow from 2.0% in 2026 to 1.7% in 2027 due to weaker real income growth and consumer spending, despite continued investment in AI.
Eurozone growth is projected to slow to 0.8% in 2026, then rise to 1.2% in 2027, supported by increased defense spending. Meanwhile, China’s growth is expected to decline to 4.4% in 2026 and 4.3% in 2027.
These projections reflect the uneven impact of energy shocks across economies, depending on their structural characteristics.
The OECD also expects inflation across G20 countries to rise to 4.0% in 2026, 1.2 percentage points higher than previous forecasts, before declining to 2.7% in 2027 as energy price pressures ease. Core inflation in advanced economies is projected to fall from 2.6% to 2.3%.
However, downside risks remain significant, particularly if supply disruptions persist or energy prices rise further, which could fuel inflation, weaken growth, and trigger greater financial market volatility.
In addition to war-related disruptions, bilateral U.S. tariff rates have declined following a Supreme Court ruling against tariffs imposed under the International Emergency Economic Powers Act, with significant reductions affecting major emerging economies such as Brazil, China, and India.
Nevertheless, effective tariff rates remain above pre-2025 levels. While this development suggests a partial improvement in the global trade environment, it does not signal a full return to previous levels of openness. Persistently elevated tariffs reflect ongoing trade tensions and their continued impact on global trade flows.
At the same time, the shock of rising energy prices and supply chain disruptions is occurring while inflation remains above target levels in several major economies, including Brazil, Mexico, Turkey, the United Kingdom, and the United States.
Medium-term inflation expectations have also increased as a result of these shocks. This convergence of pressures complicates economic policymaking and reinforces the view that current inflationary dynamics are not entirely temporary, but may persist for a longer period.
The war in the Middle East is no longer a regional conflict with contained consequences. It has evolved into a systemic shock testing the resilience of the global economy.
Rising energy prices, disrupted supply chains, financial volatility, and persistent inflation pressures are collectively exposing structural weaknesses in the international economic system.
As geopolitical tensions intensify, the global economy faces a critical test, not only of its capacity to absorb shocks but of its ability to adapt to a more unstable and fragmented world order.
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