The Middle East conflict has become the central risk to the global economy, according to the OECD, not because every economy is contracting, but because disruption to energy and industrial inputs is colliding with already-fragile growth. The result is a familiar but politically difficult dilemma: governments must protect households from higher prices without prolonging inflation or weakening public finances.
The OECD projects global GDP growth of 2.9% in 2026 and 3.0% in 2027. Those figures suggest resilience, but they also mark a world economy operating below its recent potential. The organisation says the conflict has pushed up energy and agricultural prices, reduced projected growth and raised inflation expectations. Its September outlook nevertheless found that sizeable oil inventories, non-Gulf supply and government support had cushioned the initial shock. (OECD Economic Outlook)
Why energy matters beyond the battlefield
Oil and gas disruptions transmit rapidly through transport, electricity, chemicals, food production and manufacturing. Even countries far from the conflict can face higher import bills, weaker currencies and renewed pressure on central banks to keep interest rates high. That combination damages real incomes: households pay more for essentials while businesses delay investment because borrowing and operating costs rise.
The shock is not solely a supply story. Governments may respond with fuel subsidies, tax reductions or price controls, limiting the immediate pain but shifting costs onto budgets. Such measures can also sustain demand for scarce energy and make it harder for central banks to bring inflation down. The OECD expects G20 headline inflation to rise to 4.1% in 2026 before falling to 3.6% in 2027, assuming energy prices ease and monetary policy remains restrictive. (OECD projections)
“The conflict in the Middle East has become the dominant force shaping the global economic outlook.”
That assessment does not mean the same policy is appropriate everywhere. Import-dependent emerging markets are more exposed to food and fuel inflation, while energy exporters may receive a temporary windfall. Advanced economies generally have greater fiscal capacity, but their populations may be less tolerant of another cost-of-living shock after years of elevated prices.
AI offers support, not immunity
One reason the global economy has avoided a sharper downturn is continued investment linked to artificial intelligence. The OECD says AI-related activity has supported investment, production and trade, helping offset weaker momentum elsewhere. The technology boom is therefore doing more than lifting a group of companies: it is sustaining demand for data centres, semiconductors, electricity, construction and specialised services.
But AI cannot neutralise a geopolitical energy shock. Its gains are concentrated among firms and countries with access to capital, advanced chips and reliable power. Data-centre expansion can also increase electricity demand, intensifying competition for energy precisely when supply is under pressure. If markets begin to doubt the profitability of large AI investments, a reversal in technology spending could remove one of the few strong supports identified by the OECD.
Trade and policy choices
The conflict is unfolding alongside slower global commerce. An earlier OECD assessment projected trade growth would fall from 5.0% in 2025 to 3.1% in 2026 and 2.9% in 2027. That reflects weaker demand, supply-chain caution and the continuing use of tariffs and export controls as instruments of economic and strategic policy. (OECD trade outlook)
Supporters of a tougher approach argue that governments must reduce dependence on vulnerable supply routes and build domestic capacity in energy, technology and defence. Critics counter that rapid reshoring is expensive, duplicates production and can deepen the fragmentation that makes shocks harder to absorb. The practical compromise is likely to be selective diversification rather than complete economic separation.
What comes next
The immediate outlook depends on whether energy exports remain constrained, whether the conflict expands and how long elevated prices persist. Under the OECD’s relatively benign assumption that energy costs moderate in 2027, growth strengthens modestly and inflation falls. A wider escalation would challenge that forecast through higher prices, weaker confidence and renewed financial volatility.
For policymakers, the central test is distributional. Broad subsidies may be politically attractive but costly; doing nothing risks pushing vulnerable households into deeper hardship. Targeted income support, strategic reserves, energy efficiency and faster diversification offer a more durable response, though none can deliver relief as quickly as a blanket price cap.
The conflict has exposed how tightly security, climate, technology and macroeconomics are now connected. The next phase will be judged not only by battlefield developments, but by whether governments can preserve social stability while keeping inflation expectations anchored and investment flowing.