An international warning of a “dark scenario” for the global economy if the war lasts longer economy

The Organization for Economic Cooperation and Development has warned that the continuation of the energy crisis in the Middle East until the second half of 2027 may push the global economy into a “dark scenario,” including a sharp slowdown in growth and a significant rise in interest rates, in light of faltering efforts to contain the escalation between America and Iran.

The Paris-based organization said that global growth may fall to 2.1% this year and to 1.8% next year if disruptions to energy flows continue, which it described as very low levels outside major global recessions, such as the global financial crisis and the Corona pandemic.

Bloomberg reported that the fate of the global economy has become linked to the outcome of the conflict in the Middle East, after it has already curbed growth, and if it continues for a long period, it may lead to a recession in some economies and a greater rise in inflation.

The organization said in its latest economic forecasts that price pressures and weak demand may continue for some time, and may worsen even if the Strait of Hormuz is reopened, due to the effects of supply disruptions on energy, goods, and production chains.

The warnings come as efforts to stabilize the fragile truce between Washington and Tehran falter, after an Iranian attack on an American military base in Kuwait in response to American strikes targeting military sites in southern Iran, which weakened hopes of soon reaching an agreement that would allow increased ship movement through the Strait of Hormuz.

Basic scenario

In the OECD’s main scenario, the organization assumes that the crisis can be resolved soon, and that energy prices will follow current levels in futures markets, reducing global growth to 2.8% this year from 3.4% in 2025, before rising to 3.1% in 2027.

Under this scenario, the organization expects US economic growth to slow to 2% this year from 2.1% in 2025, while inflation in America will reach 3.7%, which is much higher than the Federal Reserve’s target of 2%, but lower than the organization’s forecast in March of 4.2%.

The organization expected that Britain and America would record the highest inflation rate among the G7 countries this year at 3.7%, and it also slightly raised its estimate for the growth of the British economy in 2026 to 0.9% compared to previous expectations of 0.7% in March, with growth reaching 1.1% in 2027.

The organization believes that major central banks, including the Federal Reserve and the Bank of England, may keep interest rates unchanged in the central scenario, despite the near rise in inflation, if price expectations remain under control and the energy wave does not spread to the rest of the sectors of the economy.

Extended shock

But the picture becomes darker if the war continues until 2027, as the Organization for Economic Cooperation and Development warned that this could cause the deepest global slowdown in 40 years outside of the Corona pandemic and the financial crisis in 2009, with global inflation rising by 0.4 percentage points this year and 1.3 points in 2027.

The organization’s chief economist, Stefano Scarpetta, said that the conflict in the Middle East has become the main force shaping the outlook for the global economy, adding that the global economy is again under pressure.

In the extended scenario, energy prices will be 50% higher than the levels currently indicated by futures markets, with significant shortages of energy products and agricultural and industrial inputs produced by Gulf economies.

The organization warned that the shortage of energy and raw materials could leave lasting effects on potential output, and put pressure on financial markets, confidence and investment, including artificial intelligence investments that require large amounts of energy and depend on goods used in industries such as semiconductors.

Policy dilemma

The organization said that the continued unrest may push major central banks to raise interest rates by between 50 and 75 basis points to prevent the transmission of the energy price shock to the rest of the economy, before they are forced to reduce them again in 2027 if the impact of the slowdown on growth intensifies.

Central banks face a dilemma between tightening monetary policy to curb inflation, and avoiding unnecessary damage to economic activity. Scarpetta said that central banks can ignore the rise in prices resulting from a supply shock as long as inflation expectations are stable and the effects of the second round are limited, but intervention may become necessary if price pressures expand or growth weakens significantly.

The organization warned that governments will often bear the brunt through fiscal policy, but they have limited room to intervene due to high levels of public debt, and broad energy subsidies may encourage consumption at a time when markets suffer from a shortage of supplies.

The organization said that higher interest rates will increase pressure on public finances, especially in weaker economies, and will limit the ability of governments to take optional measures to support economic activity.

In the event of a sharp tightening in market conditions, the organization said that some central banks may have to reconsider reducing their holdings of sovereign bonds that they bought during previous crises, and may return to quantitative easing or long-term financing tools in the euro zone.