The Organisation for Economic Co-operation and Development (OECD) has warned that if the Middle East conflict, particularly the Iran situation, continues into next year, it could severely impact global growth, drive some economies into recession, and cause energy shortages. In its latest Economic Outlook, the OECD presents a 'prolonged disruption' scenario where no agreement between the US and Iran is reached until 2027.
Global GDP growth forecast
Under this scenario, global GDP growth would drop to 2.1% in 2026, down from 3.4% in 2025, potentially pushing several economies into or near recession. Emerging economies would be hit hardest. Oil and gas shortages would lead to enforced rationing for businesses, and the prices of fertilisers, sulphur, helium, and other industrial inputs would rise due to supply constraints.
Policy challenges
Policymakers face a dilemma: raising interest rates too quickly to combat rising inflation from energy and food price surges could trigger a recession. The analysis also suggests that the US AI boom could be at risk, as energy price shocks would increase datacentre operating costs and constrain the supply of critical hardware, reducing AI investment and growth in economies boosted by AI.
Current negotiations
Donald Trump has hinted at an imminent deal with Tehran, calming oil markets, but no agreement has materialised. Talks are suspended as Iran refuses to participate while Israel attacks Hezbollah in Lebanon. The chokehold on the Strait of Hormuz has squeezed international oil supplies for over three months, driving up prices and prompting emergency measures globally.
OECD chief economist's view
OECD chief economist Stefano Scarpetta describes the Iran conflict as 'the dominant force shaping the global economic outlook.' In the prolonged disruption scenario, developing economies with limited energy reserves, high energy and food consumption shares, constrained fiscal capacity, weak social safety nets, low savings, and fragile currencies would suffer most.
Alternative scenario
The OECD also presents a less catastrophic scenario where progress toward a durable peace agreement allows oil prices to decline. Global GDP growth would be 2.8%, a downgrade from last year but stronger than in the prolonged disruption case, picking up to 3.1% next year. Some limited energy shortages would still occur, especially in Asia.
Corporate debt risks
In either scenario, corporate borrowing costs are likely to rise due to damaged confidence. Total corporate debt in G20 economies reached $90 trillion by Q3 2025, with a quarter maturing in the next three years, potentially rolling onto higher interest rates. The report also highlights risks in the opaque private credit sector, which has grown since the 2008 financial crisis and could create adverse spillover risks if a correction occurs.
Long-term priorities
The OECD argues that the severity of this oil shock underscores the need to reduce reliance on fossil fuels and diversify energy sources. 'Reducing reliance on foreign sources of fossil fuels and improving energy efficiency in the domestic economy are key priorities, and more pressing the longer the current disruption to global energy markets persists,' the report states.
