OECD warns energy shock will slow global growth while lifting inflation risks

The global economy is expected to remain resilient but lose momentum as a sharp energy shock linked to geopolitical tensions pushes inflation higher and dampens demand, according to the latest interim outlook from the OECD.

The report, Testing Resilience, highlights how the escalating conflict in the Middle East has disrupted energy markets, triggered volatility in financial conditions and complicated the path forward for policymakers and investors.

Global GDP is now projected to expand by 2.9% in 2026 before edging up to 3.0% in 2027, reflecting the combined effects of higher fuel costs, supply-chain disruptions and continued uncertainty about the conflict’s duration.

“The energy supply shock from the evolving conflict in the Middle East is testing the resilience of the global economy. We project global growth will remain robust, but it will be slower than the pre-conflict trajectory, with significantly higher inflation,” OECD Secretary-General Mathias Cormann said.

Energy shock weighs on outlook

According to the OECD analysis, curtailed shipments through the Strait of Hormuz and damage to key infrastructure have pushed up oil, gas and fertilizer prices, adding pressure to both business costs and household budgets.

Crude prices rose by more than 50% between the start of the conflict and mid-March, while gas markets in Europe and Asia also tightened significantly. If sustained, these price increases are likely to lift consumer inflation and slow economic activity across both advanced and emerging markets.

The energy surge is occurring at a time when inflation had already remained above central bank targets in several major economies, including the United States and United Kingdom.

The OECD now expects headline inflation across the G20 to reach 4.0% in 2026 — 1.2 percentage points higher than previously forecast — before easing to 2.7% in 2027 as energy pressures fade.

AI investment provides a counterweight

Despite the geopolitical headwinds, the global economy entered 2026 with strong underlying momentum driven by artificial intelligence-related investment and improving trade conditions.

Technology-related production has continued to expand rapidly, particularly in Asia and the United States, helping offset weaker consumer demand in some sectors.

However, the OECD cautioned that prolonged energy disruptions could undermine these gains and trigger broader repricing in financial markets.

Diverging regional growth prospects

Growth trajectories are expected to vary significantly across major economies.

US output is forecast to moderate from 2.0% in 2026 to 1.7% in 2027 as slower real income growth and softer consumer spending begin to offset strong technology investment.

In the euro area, GDP growth is projected to weaken to 0.8% in 2026 before recovering to 1.2% the following year, aided by increased defense spending and easing inflation.

China’s expansion is expected to slow more gradually, reaching 4.4% in 2026 and 4.3% in 2027.

These forecasts assume that energy market disruptions begin to moderate from mid-2026, allowing oil, gas and fertilizer prices to trend lower over time.

Policy trade-offs intensify

Central banks face a delicate balancing act between containing inflation expectations and supporting growth. Monetary authorities may need to tighten policy if price pressures broaden or labor markets weaken more sharply than anticipated.

At the same time, governments are being urged to target fiscal support carefully.

“Any policy measures adopted to cushion the impact of the energy price shock should be targeted towards those most in need, temporary, and ensure incentives to save energy are preserved,” Cormann said.

With public debt levels already elevated across many countries, additional spending to shield households and businesses from higher fuel costs could add further strain to government finances.

Risks remain skewed to the downside

The OECD warned that the outlook could deteriorate if energy prices remain elevated for longer than assumed or if supply disruptions worsen. Such scenarios could lead to deeper declines in output, tighter financial conditions and renewed volatility in global markets.

Conversely, a quicker resolution to geopolitical tensions or stronger-than-expected productivity gains from AI investment could support growth and ease inflation pressures.

For investors, the report highlights the importance of monitoring energy markets, policy responses and the evolving trajectory of technology-driven productivity as key drivers of asset allocation decisions in the coming year.