Global economy gets downgrade as Middle East conflict disrupts energy supply, trade routes

The global economy just got downgraded, and the reason is clear. The OECD said on Thursday that the war tied to the U.S. and Israel attacking Iran is now hitting growth and pushing prices higher across the economy.

Before this conflict, the global economy was actually doing better than expected, with the OECD saying that Trump’s tariffs last year did not break growth.

The OECD added that it was preparing to raise its forecast to 3.2% from 2.9%. That improvement came from strong AI investment and lower interest rates.

Then late February changed everything, as major headlines became dominated by America and Israel’s war on Iran, where key energy and transport sites were damaged. The Strait of Hormuz became restricted and has now been “officially halted for all enemies of Iran,” according to their Foreign Minister Abbas Aragchi.

War disrupts energy supply and drags global growth projections down

The OECD said the economy is now being pulled in two directions. Asa Johansson, the policy studies director, said, “The forecast is shaped by two counteracting forces.” Asa said the economy was stronger than expected at first, then the war started dragging it down.

She also said the situation is uncertain because no one knows how long the energy shock will last or how wide it will spread.

The OECD kept its 2026 global growth outlook unchanged under a base case where energy prices fall later this year. But it also gave a worse scenario.

If energy stays expensive, the economy grows just 2.6% this year. That is more than half a percentage point below what was expected before the war. The hit in 2027 would be bigger.

Country forecasts show a split inside the economy. The U.S. outlook was raised to 2% from 1.7%, supported by AI spending. Europe moved the other way. The eurozone is now seen at 0.8% instead of 1.2%.

China stayed at 4.4%. The U.K. saw the biggest cut. Growth is now 0.7%, down from 1.2%. Asa said the U.K. was already weak before the war began.

Inflation rises across major economies as G7 warns about damage

Inflation is now rising across the economy, even if growth damage stays limited. The OECD said inflation across G20 countries will average 4% this year.

That was previously seen at 2.8%. The U.S. is now expected at 4.2% instead of 3%. The U.K. is at 4% instead of 2.5%. The eurozone is now 2.6% instead of 1.9%. Japan is at 2.4%, slightly higher than before.

The OECD said inflation could cool again in 2027 if energy prices fall back to levels seen before the war. Because of that, central banks may not need to raise rates if the increase in prices does not last long.

Outside the OECD, pressure is building. European members of the G7 warned the war is already damaging the economy before a key summit in France. Foreign ministers from the U.S., U.K., Canada, France, Germany, Italy, and Japan are meeting for two days. Iran and Ukraine are the main topics.

European officials want the U.S. to find a way to reduce tensions with Iran. U.S. Secretary of State Marco Rubio is expected to arrive on Friday. Talks are stuck, and there is still no ceasefire. There is also concern about further escalation, including possible ground operations.

Boris Pistorius, Germany’s defense minister, said, “To make it crystal clear, this war is a catastrophe for the world’s economies.” Boris also said Germany and its partners were not consulted before the conflict. He said, “Nobody asked us before. It’s not our war.”

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