OECD Issues Dire Warning as Middle East Conflict Escalates Economic Risks
The Organisation for Economic Cooperation and Development (OECD) has released a stark interim outlook, predicting that the ongoing US-Israel war on Iran will severely test the resilience of the global economy. This conflict is expected to trigger a major inflationary spike, with soaring fuel prices threatening growth across European and Asian nations, while Australia faces slashed growth prospects for the coming years.
Global Growth Forecasts Downgraded Amid Energy Price Shock
In its latest report, the Paris-based OECD highlighted significant downside risks to economic forecasts, warning that persistent oil supply disruptions could push energy prices even higher. The organisation downgraded growth across the Euro area, the UK, and South Korea by 0.4 to 0.5% for this year compared to December forecasts. Inflation across G20 countries is now projected to reach 4% through 2026, a 1.2 percentage point increase from pre-conflict estimates, largely due to the closure of the Strait of Hormuz following US-Israeli military actions.
The international crude oil benchmark surged to $104 a barrel in recent trading, marking a 70% increase since the start of the year. This energy price shock has undermined the anticipated boost to global growth from the artificial intelligence investment boom, according to the OECD. The report cautioned that longer-lasting disruptions to oil and gas production or exports through the Strait of Hormuz could have more severe adverse consequences than currently reflected in world markets.
Australia's Economic Outlook Dims as Inflation and Rates Climb
Local economists are revising Australia's growth forecasts downward in response to the conflict. Adelaide Timbrell, a senior economist at ANZ, stated that higher oil prices and climbing interest rates will negatively impact Australia's growth this year and next. ANZ forecasts Australia's growth rate to drop to 1.3% in 2026, 0.5 percentage points lower than February predictions and only half of last year's growth. The effects of the war are expected to linger into 2027, with real GDP growth revised down to 1.8% from a pre-war forecast of 2.2%.
Inflation in Australia is projected to reach 4.9% by June, up from a previous forecast of 3.8%, and end the year at 4.5% instead of 3.4%. These forecasts assume some retracement in energy prices later this year and sufficient fuel supply to avoid mandatory rationing or widespread disruptions.
Economists Highlight Inflation and Growth Shocks for Households
Jo Masters, chief economist at Barrenjoey, described the situation as an inflation shock and a growth shock, with inflation being the primary immediate concern. She noted that households, in aggregate, are in relatively good shape due to higher savings rates and additional mortgage payments, providing some buffers against economic pressures. However, people will likely feel the impact of rising prices more acutely in daily expenses such as petrol, transport, and food.
Pradeep Philip, lead partner at Deloitte Access Economics, emphasized that Australia is entering a difficult period with rising unemployment and inflation trajectories becoming more visible. While not akin to 1970s-style stagflation, he warned that individuals will experience significant pressure from increasing costs, affecting their overall quality of life.
The OECD's warnings underscore the broader global economic vulnerabilities exposed by the Middle East conflict, with energy exporters like the US and Australia facing less severe impacts but still grappling with inflationary challenges and growth uncertainties.
