Global economic outlook weakens amid energy shock, inflation: OECD

Due to the uncertainty around the evolution of the conflict, the Outlook sets out two scenarios.

The first is a ‘time-limited disruption’ scenario, in which energy production and trade in the Gulf economies progressively return to pre-conflict levels starting mid-2026, leading to a gradual unwinding of the disruptions.

The second is a ‘prolonged disruption’ scenario, which assumes that the current disruptions to energy production and exports in the Gulf economies persist well into 2027, with higher energy prices, intensifying risks of supply shortages and a tightening of global financial conditions, all of which carry broader and more long-lasting consequences for the global economy.

Under the ‘time-limited disruption’ scenario, OECD projects global growth slowing from 3.4 per cent in 2025 to 2.8 per cent in 2026 before picking up to 3.1 per cent in 2027.

Under this scenario, gross domestic product (GDP) growth in the United States is projected at 2 per cent in 2026 before slowing to 1.8 per cent in 2027. In the euro area, growth is projected to remain modest at 0.8 per cent in 2026 before picking up to 1.2 per cent in 2027. China’s growth is projected to slow to 4.5 per cent this year and 4.3 per cent in 2027.

Under the ‘prolonged disruption’ scenario, global growth is projected to slow to 2.1 per cent in 2026 and 1.8 per cent in 2027, leaving a lasting mark on many countries, especially in Asia, Europe and developing economies most vulnerable to the energy and food price shock.

Growth in the OECD under this scenario is projected at 0.9 per cent in 2026 and 0.5 per cent in 2027 compared 1.5 per cent in 2026 and 1.7 per cent in 2027 under the first scenario, an OECD release said.

Inflationary pressures are rising in both advanced and emerging market economies. The energy shock is leading to higher commodity prices, while indirect effects are boosting prices across the economy, notably for agricultural inputs and food.

In the ‘time-limited disruption’ scenario, annual consumer price inflation in the G20 economies is collectively expected to rise to 4 per cent in 2026 from 3.4 per cent in 2025, before easing to 3.1 per cent in 2027 as energy and food price pressures fade. Inflation would rise significantly higher in the prolonged disruption scenario.

Throughout this uncertain period, central banks must remain vigilant, but the supply-driven rise in prices need not trigger a policy response, as long as inflation expectations remain well anchored, the OECD report remarked.

However, a monetary policy response may become necessary if broader price pressures intensify, or if growth weakens significantly, it added.

Fibre2Fashion News Desk (DS)