International Warning of a "Dark Scenario" for the Global Economy if the War Lasts

SadaNews - The Organization for Economic Cooperation and Development (OECD) has warned that the ongoing energy crisis in the Middle East until the second half of 2027 could push the global economy into a "dark scenario," which includes a sharp slowdown in growth and a significant increase in interest rates, amid faltering efforts to contain the escalation between the U.S. and Iran.

The Paris-based organization stated that global growth could drop to 2.1% this year and to 1.8% next year if energy flow disruptions continue, levels it described as extremely low outside major global recession periods, such as the global financial crisis and the COVID-19 pandemic.

Bloomberg noted that the fate of the global economy has become linked to the developments of the conflict in the Middle East, which has already hindered growth, and could lead to a recession in some economies and a further rise in inflation if it persists.

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

These warnings come as efforts to stabilize the fragile ceasefire between Washington and Tehran falter following an Iranian attack on a U.S. military base in Kuwait in response to American strikes targeting military sites in southern Iran, which has weakened hopes for a deal allowing increased shipping through the Strait of Hormuz.

Base Scenario

In the OECD's main scenario, the organization assumes that the crisis may be resolved soon, and that energy prices will follow the 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 U.S. economic growth to slow to 2% this year from 2.1% in 2025, while inflation in America will be at 3.7%, which is significantly above the Federal Reserve's target of 2%, but lower than the organization's forecast in March of 4.2%.

The organization projected that the UK and the US would record the highest inflation rates among the G7 countries this year at 3.7%, and slightly raised its estimates for UK economic growth in 2026 to 0.9% compared to previous forecasts of 0.7% in March, with growth expected to reach 1.1% in 2027.

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

Prolonged Shock

However, the picture becomes more pessimistic if the war continues until 2027, as the OECD warned that this may cause the deepest global slowdown in 40 years outside the COVID-19 pandemic and the 2009 financial crisis, with global inflation rising by 0.4 percentage points this year and 1.3 percentage points in 2027.

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

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

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

Policy Dilemma

The organization stated that continued disruptions could compel major central banks to raise interest rates by 50 to 75 basis points to prevent the energy price shock from spreading to the rest of the economy, before they might have to lower 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 harm to economic activity, with Scarpetta noting that central banks can ignore price increases resulting from supply shocks as long as inflation expectations are stable and second-round effects are limited, but intervention may become necessary if price pressures widen or growth weakens significantly.

The organization warned that governments will likely bear the brunt of the burden through fiscal policy, but they have limited room for intervention due to high levels of public debt, and broad energy support could encourage consumption at a time when markets are suffering from supply shortages.

The organization stated that rising interest rates will increase pressure on public finances, especially in weaker economies, and will limit governments' ability to take discretionary measures to support economic activity.

In case of a sharp tightening of market conditions, the organization stated that some central banks might have to reconsider reducing their holdings of sovereign bonds purchased during previous crises, and might return to quantitative easing or long-term financing tools in the euro area.