The Organisation for Economic Co-operation and Development (OECD) delivered a cautious global economic outlook on Wednesday, downgrading growth forecasts while raising inflation projections as the ongoing Middle East conflict continues to disrupt energy supplies and unsettle markets.
In its latest Economic Outlook, the Paris-based institution highlighted how geopolitical tensions, particularly around the Strait of Hormuz, are creating fresh headwinds for the world economy.
The energy price volatility has complicated the path to a soft landing for major economies already grappling with post-pandemic challenges
Oil market volatility intensifies
Oil prices have swung sharply in recent sessions. They rose significantly on Monday after Iran announced the suspension of indirect talks with the US, against the backdrop of Israel’s offensive against Hezbollah in Lebanon.
On Wednesday, crude oil extended gains from the previous two sessions to climb over 2% as hostilities between the US and Iran in the Middle East continued.
Iran launched ballistic missiles towards regional neighbours Kuwait and Bahrain, injuring dozens according to Kuwaiti authorities, and US forces conducted strikes on Iran’s Qeshm Island.
Iranian news agency Tasnim also reported that Iran and its regional allies were considering a full blockade of the Strait of Hormuz and the Bab el-Mandeb Strait.
Brent crude spiked to nearly $99 per barrel before pulling back. This morning, prices were trading around $98.
Carsten Fritsch, commodity analyst at Commerzbank AG, noted the dramatic swings in a recent report.
Hopes of a resumption of oil supplies from the Gulf region had caused oil prices to fall by almost 20% in May, marking the sharpest monthly decline since the start of the coronavirus pandemic in March 2020.
This volatility underscores the fragile nature of the current energy market and its direct impact on global economic stability.
Growth forecasts trimmed
The OECD has revised down its global GDP growth projections for 2026, citing the energy supply shock from restricted shipping through the Persian Gulf.
Advanced economies, particularly in Europe, face compounded challenges as higher energy costs weigh on consumption and industrial activity.
The United States, the Euro area, and the United Kingdom have all seen downward revisions.
Emerging markets are also feeling the pinch through higher import bills and weaker global demand.
The report marks a shift from earlier optimism, as the Middle East conflict disrupts what had been a gradual recovery.
Inflation pressures resurface
Higher energy costs are feeding directly into broader price levels, forcing the OECD to raise its inflation forecasts.
After significant progress in taming inflation over the past two years, central banks now risk facing renewed pressure.
This creates a policy dilemma: aggressive rate hikes could stifle growth, while hesitation might allow inflation to become more persistent.
G20 inflation projections have been revised higher, with second-round effects on wages and services adding to the concern.
Regional divergences and vulnerabilities
Europe remains particularly exposed due to its reliance on imported energy.
Germany and other industrial powerhouses are feeling the strain, while France continues to attract foreign investment but cannot fully escape the broader energy-driven slowdown.
In the US, resilient consumer spending is being tested by rising fuel costs.
Meanwhile, commodity exporters may see some short-term benefits, but a broader slowdown in global trade poses risks.
Fritsch’s analysis highlighted how quickly sentiment can shift. Despite Monday’s spike toward $98, prices had retreated on renewed diplomatic hopes in the next session, illustrating the market’s sensitivity to every headline from the region.
Prices were back around that level again on Wednesday.
Policy challenges ahead
The OECD urges policymakers to balance inflation control with growth support.
Targeted fiscal measures to protect vulnerable households are recommended, alongside accelerated efforts toward energy diversification and resilience.
Downside risks remain significant. A prolonged closure of the Strait of Hormuz could trigger deeper economic pain, potentially pushing several economies into recession.
On the upside, a swift diplomatic resolution and reopening of key shipping routes could allow for a stronger rebound in 2027.
Technological advancements in AI and green energy continue to provide structural tailwinds, but near-term challenges dominate the narrative.
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