In their latest published report, the Organization for Economic Cooperation and
Development (OECD) stated that due in large part to the escalating Middle East conflict,
inflation is expected to move noticeably higher in the coming year. As energy shipments
through the Strait of Hormuz grind to a halt, the expected inflation rate not only for the
United States but for all G20 nations, is expected to top 4.0%, 1.2 points higher than the
projected 2026 rate.
Additionally, forecasted growth to the global economy has slowed down, with projected
U.S. GDP dropping from 2.0% in 2026, to 1.7% in 2027.
The Paris-based organization had stated that the global economy had been on course for
stronger than expected growth prior to the war with Iran, but in the wake of the conflict,
those projections have been scuttled.
Global GDP growth is expected to slide down from last year’s 3.3% growth to 2.9%, and to
curve back up to 3.0% in 2027, as the spike in energy costs and uncertainty around the
length and scope of the conflict remain.
“There’s a high level of uncertainty around the duration and the magnitude of the current
conflict in the Middle East,” said OECD chief Mathias Cormann in a statement to the press.
“And that means that this outlook is subject to significant downside risks that could result
in lower growth and higher inflation.”
2026 GDP growth projections remain unchanged from December, however there were
preliminary indications early this year that the number may be revised upward by 0.3% had
the conflict not escalated. That revision no longer seems likely.
With the spike in energy prices, the inflationary rate for G20 nations is projected to be 1.2%
higher than previously expected, pushing that number back up to 4.0% for 2026, before
settling back to 2.7% in 2027.
More sobering is the adverse effect scenario wherein, if energy prices peak higher and
remain elevated longer, global growth would be 0.5% lower by the second year, and
inflation would be 0.9% higher.
Conversely, China is expected to maintain their projected GDP of 4.4% this year, and 4.3%
in 2027, both in line with previous forecasts.
In Japan, their projected growth of 0.9% for both 2026 and 2027 are expected to remain on
track.
European nations are expecting a GDP slip of 0.8%, with a rebound of 1.2% in 2027, buoyed
by stronger defense spending. That downgrade is significant, considering the European
forecast in December called for 1.2% growth in 2026, and 1.4% in 2027.
As for the United States, the trade picture remains murky, as bilateral tariff rates have
declined, following the Supreme Court ruling against tariffs imposed under the
International Emergency Economic Powers Act, and the uncertainty of the conflict
compounds the issue further. Still, the overall U.S. effective tariff rate remains well above
the levels prior to 2025.
Prior to the Supreme Court ruling, the OECD had forecasted 1.7% growth this year, and
1.9% for 2027. Growth is projected to moderate from 2.0% this year, to 1.7% in 2027, as
heavy AI-investment growth will likely be offset by a slow down of overall economic growth
and projected drop in consumer spending.
The report also projects U.S. inflation to reach 4.2% in 2026, up 1.2 percentage points from
the previous forecast.
With the increase in projected inflation, the OCED urged central banks to remain diligent
with their decision-making regarding setting interest rate policy. The Federal Reserve has
been measured with their rate reductions over the last year and holding the rate steady as
of their last meeting. If inflation creeps higher, the central bank may hold off on deeper rate
cuts for the immediate present.
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