Cairo - 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 an environment of acute uncertainty surrounding 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.
A Global System Under Stress
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.
Market Volatility and Financial Fragility
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.
Rising Costs and Eroding Growth
Prior to the escalation of the conflict, the global economy had shown notable resilience, supported by investment in artificial intelligence, productivity gains, and accommodative fiscal and monetary policies.
These factors helped sustain growth momentum despite earlier challenges, underscoring the expanding role of technology—particularly AI—as a key driver of economic activity. At the same time, supportive policies bolstered confidence and demand, helping to absorb previous shocks.
However, the OECD notes that the outlook for the Middle East conflict “remains uncertain in both scope and duration.” Prolonged increases in energy prices are expected to raise business costs and consumer inflation significantly, weighing on growth across economies depending on their structural 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 slower growth, highlighting the tight interdependence between energy prices and overall economic activity.
Slowing Global Growth
The OECD projects that global GDP growth will slow to 2.9% in 2026 before edging up to 3.0% in 2027. Energy price shocks and conflict-related uncertainty are raising costs and dampening demand, offsetting gains from technological investment and lower tariffs.
These projections assume a gradual easing of energy market disruptions beginning in mid-2026. This reflects a delicate balance between supportive and constraining forces, leaving the global outlook 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, driven by weaker real income growth and consumer spending, despite continued investment in AI.
Eurozone growth is projected to slow to 0.8% in 2026 before recovering to 1.2% in 2027, supported in part by increased defense spending. Meanwhile, China’s growth is expected to ease to 4.4% in 2026 and 4.3% in 2027.
These projections highlight the uneven impact of energy shocks across economies, shaped by their structural characteristics.
The OECD also expects inflation across G20 economies to rise to 4.0% in 2026—1.2 percentage points above previous forecasts—before easing to 2.7% in 2027 as energy price pressures moderate. Core inflation in advanced economies is projected to decline from 2.6% to 2.3%.
However, downside risks remain significant. Persistent supply disruptions or further increases in energy prices could intensify inflation, weaken growth, and heighten financial market volatility.
Tariffs, Trade, and Inflation Pressures
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 notable reductions affecting major emerging economies such as Brazil, China, and India.
Nevertheless, effective tariff rates remain above pre-2025 levels. While this suggests a partial easing in the global trade environment, it does not mark a full return to prior levels of openness. Elevated tariffs continue to reflect underlying trade tensions and their sustained impact on global trade flows.
At the same time, rising energy prices and supply chain disruptions are hitting as inflation remains above target in several major economies, including Brazil, Mexico, Turkey, the United Kingdom, and the United States.
Medium-term inflation expectations have also edged higher in response to these shocks. This convergence of pressures complicates policymaking and reinforces the view that current inflation dynamics are not purely temporary, but may persist for longer than anticipated.
A Fragile Global Order
The war in the Middle East is no longer a regional conflict with contained consequences. It has become a systemic shock, testing the resilience of the global economy.
Rising energy prices, disrupted supply chains, financial volatility, and persistent inflationary pressures are 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.