OECD Warns Middle East Conflict Could Trigger 10% Global Economic Downgrade as Energy Supply, Trade Routes Disrupted

The OECD has issued a stark warning that escalating Middle East conflict could trigger a severe 10% correction in global economic growth, reversing earlier optimistic forecasts. This abrupt shift follows Iran's declaration of a full blockade of the Strait of Hormuz to 'all enemies,' crippling critical energy supplies and trade routes that previously fueled robust AI-driven expansion and falling interest rates.

War disrupts energy supply and drags global growth projections down

The OECD said the economy is now being pulled in two directions. Asa Johansson, the policy studies director, said, “The forecast is shaped by two counteracting forces.” Asa said the economy was stronger than expected at first, then the war started dragging it down.

She also said the situation is uncertain because no one knows how long the energy shock will last or how wide it will spread.

The OECD kept its 2026 global growth outlook unchanged under a base case where energy prices fall later this year. But it also gave a worse scenario.

If energy stays expensive, the economy grows just 2.6% this year. That is more than half a percentage point below what was expected before the war. The hit in 2027 would be bigger.

Country forecasts show a split inside the economy. The U.S. outlook was raised to 2% from 1.7%, supported by AI spending. Europe moved the other way. The eurozone is now seen at 0.8% instead of 1.2%.

China stayed at 4.4%. The U.K. saw the biggest cut. Growth is now 0.7%, down from 1.2%. Asa said the U.K. was already weak before the war began.

Inflation rises across major economies as G7 warns about damage

Inflation is now rising across the economy, even if growth damage stays limited. The OECD said inflation across G20 countries will average 4% this year.

That was previously seen at 2.8%. The U.S. is now expected at 4.2% instead of 3%. The U.K. is at 4% instead of 2.5%. The eurozone is now 2.6% instead of 1.9%. Japan is at 2.4%, slightly higher than before.

The OECD said inflation could cool again in 2027 if energy prices fall back to levels seen before the war. Because of that, central banks may not need to raise rates if the increase in prices does not last long.

Outside the OECD, pressure is building. European members of the G7 warned the war is already damaging the economy before a key summit in France. Foreign ministers from the U.S., U.K., Canada, France, Germany, Italy, and Japan are meeting for two days. Iran and Ukraine are the main topics.

European officials want the U.S. to find a way to reduce tensions with Iran. U.S. Secretary of State Marco Rubio is expected to arrive on Friday. Talks are stuck, and there is still no ceasefire. There is also concern about further escalation, including possible ground operations.

Boris Pistorius, Germany’s defense minister, said, “To make it crystal clear, this war is a catastrophe for the world’s economies.” Boris also said Germany and its partners were not consulted before the conflict. He said, “Nobody asked us before. It’s not our war.”

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