OECD warns Middle East conflict to derail recovery, drive inflation higher
Strait of Hormuz disruptions push Brent above $100 as global growth forecast cut to 2.9% for 2026
The Organisation for Economic Co-operation and Development warned on Thursday that the ongoing Middle East conflict threatens to derail the global economic recovery and push inflation sharply higher, projecting G20 inflation will reach 4% through 2026, a 1.2 percentage point increase from previous forecasts.
International crude oil benchmarks have surged 70% since the start of the year, with Brent crude trading at $104 per barrel as disruptions to the Strait of Hormuz constrain global energy supplies. The strategic waterway, through which approximately 20% of the world's daily oil production passes, has faced near-halt conditions following military actions in the region.
The OECD cut its global economic growth forecast to 2.9% for 2026, down from 3.3% projected for 2025, citing the energy price shock as the primary factor. The sharp escalation in oil and gas prices has offset anticipated growth boosts from artificial intelligence investment, creating a significant headwind for the global economy just as recovery appeared to be gaining momentum.
"A prolonged period of elevated energy prices would significantly increase business costs, drive up consumer price inflation, and negatively affect economic growth," the OECD warned in its latest Economic Outlook. The organization noted that each month of restricted flows through the Strait of Hormuz could alter the oil price outlook by approximately $10-$15 per barrel, potentially driving prices into the $110-$150 range if disruptions persist.
The inflationary shock presents a particular challenge for central banks, particularly the Federal Reserve, which had been preparing to cut interest rates as inflation appeared to be moderating. With energy costs surging and freight rates from Red Sea shipping disruptions adding upward pressure to consumer prices, the Fed's policy flexibility is now constrained by persistent inflation pressures.
Goldman Sachs projects Brent crude to average $85 per barrel, while J.P. Morgan anticipates prices reaching $100 per barrel in the second quarter of 2026. However, these forecasts assume some easing of geopolitical tensions. A more severe scenario involving prolonged closure of the Strait of Hormuz could halt 20% of global oil supply flows, potentially pushing prices well above current levels.
The economic impact is being felt unevenly across regions. Australia, a net energy exporter, saw its growth forecast slashed to 1.3% for 2026, down 0.5 percentage points from earlier predictions, with inflation expected to reach 4.9% by June. Other energy-importing nations face similar headwinds, while major oil producers may benefit from higher export revenues even as broader economic activity slows.
Market participants are now reassessing the path for interest rates and growth expectations, with the OECD's warning underscoring how geopolitical risks have replaced traditional cyclical factors as the primary concern for global investors. The coming weeks will be critical for determining whether diplomatic efforts can reduce tensions and allow energy markets to normalize, or whether the global economy faces an extended period of stagflationary pressure.