The global economic outlook hinges on how long the war in the Middle East lasts, with recession in some countries and sharply higher inflation a real possibility if it drags on into next year, the Organisation for Economic Cooperation and Development warned today.
If the conflict proves short-lived, Gulf oil and gas production could gradually return to pre-crisis levels from the third quarter with shortages confined to Asia and cushioned by strategic reserves and shipments from other producers.
In that baseline scenario, global growth is projected to slow from 3.4% in 2025 to 2.8% in 2026 before picking up to 3.1% in 2027, broadly in line with the OECD's March forecasts.
But if energy disruption persists well into next year, global growth could slow sharply to 2.1% in 2026 and 1.8% in 2027 - rates rarely seen outside major crises such as the 2008 to 2009 financial crash or the Covid pandemic.
Some economies could fall into outright recession, with Asian countries reliant on Middle East energy supplies expected to be hit hardest.
Higher energy prices could add 0.4 percentage points to global inflation in 2026 and 1.3 percentage points in 2027, likely prompting central banks to hike interest rates by 0.5 to 0.75 percentage points in the short term.
In the baseline scenario, the OECD forecast that inflation across G20 economies would peak at 4% this year before slowing to 3.1% next year with interest rates largely on hold this year and cuts expected next year.
Global trade growth is set to moderate following a strong 2025, though robust demand for AI-related goods and investment, especially in Asia, should provide some support.
In the baseline scenario, stronger energy exports are expected to support US growth, partly offsetting the drag from higher prices on household purchasing power. Growth is projected to ease from 2.1% in 2025 to 2.0% in 2026 and 1.8% in 2027.
In Europe, euro zone growth was seen slowing from 1.4% to 0.8% this year before rising to 1.2% next year as resilient labour markets and higher defence spending help offset government belt-tightening.
OECD predicts Irish MDD of 2.1% for this year
The OECD has forecast that Irish Modified Domestic Demand (MDD) is projected to expand by 2.1% this year and 2.5% in 2027.
Tánaiste and Minister for Finance Simon Harris said that while these forecasts remain broadly consistent with the Government's own assessment of the economy, they underline the more challenging international environment that now exists.
"Similar to the Annual Progress Report which my Department published in April, the OECD assesses the macroeconomic impact of a scenario in which energy prices remain higher for a sustained period of time; in these circumstances, global growth would likely be considerably lower both this year and next, an outcome that would weigh on domestic economic prospects," Mr Harris said.
"All-in-all, the OECD's analysis highlights why we must plan for all eventualities at this very uncertain time. We must do all we can to maintain Ireland’s standing as a competitive and supportive environment for inward and indigenous investment and quality employment," he added.
In Britain, growth is projected to slow to 0.9% this year before recovering to 1.1% in 2027 as global trade stabilises and financial conditions ease.
In Asia, China was seen slowing from 5% growth in 2025 to 4.5% in 2026 and 4.3% in 2027 with ample energy reserves limiting exposure to oil price spikes. Exports are set to benefit from lower US tariffs and a competitive tech sector, although a property slump remains a drag.
Japan is expected to be among the hardest-hit by trade disruptions linked to the Gulf conflict, with growth slowing from 1.1% in 2025 to 0.6% in 2026 before edging up to 0.8% in 2027, a downgrade from March.
While subsidies will help cushion the energy shock, the OECD said Japan needs a "clear and credible" plan to rein in public finances over the medium term as interest rates rise.
