Middle-East conflict expected to slow global growth, increase inflation

Global energy and market disruption caused by the conflict in the Middle East has pushed up commodity prices and increased volatility in financial markets, the OECD says.

The conflict is testing the resilience of the global economy, which has been driven by supportive financial and fiscal conditions and increasing demand for AI technologies.

In its March 2026 Economic Outlook Interim Report, the OECD emphasised that central banks should remain vigilant and ensure expectations are “well-anchored”, with stronger policy efforts required to safeguard the sustainability of public finances. Nations must lower trade barriers to boost output and reduce inflationary risks, it added.

“Monetary policy rate developments are becoming increasingly varied across countries. Rates remain at or close to restrictive levels in the United States, the United Kingdom, Brazil, Mexico, South Africa and Turkey, and have recently been raised in Australia, reflecting stronger-than-expected inflation pressures, and Japan,” the report read.

A continuing conflict will impact global growth and push up inflation, with a key risk being that prolonged export disruptions from the Middle East will lead to greater price hikes and increase shortages of key commodities, the OECD said.

“Such a scenario, or lower than expected returns from AI investment, could prompt more extensive repricing in financial markets, weaken private demand and raise financial stability risks,” the outlook read.

A test of global economic resilience

The Middle East conflict has caused an energy supply shock, which is expected to weigh significantly on global growth and add further upward pressure to inflation.

Despite its outlook projecting 2.9 per cent global growth in 2026 and 3.0 per cent in 2027, the evolution of the conflict will add considerable risks to baseline projections. The OECD warned that if energy prices remain elevated beyond mid-2026, global growth prospects may be further reduced.

The OECD projected Australia’s real GDP growth at 2.3 per cent for 2026 and 2.4 per cent for 2027. It noted signs of a resurgence in inflation in Australia before the Middle East conflict.

“A policy rate rise [is] projected in Australia in the second quarter of 2026, with rates then lowered gradually through 2027 as inflation wanes,” the report read.

Further, it projected that the nation’s headline inflation would be 2.5 per cent in 2027, with core inflation at 3.5 per cent in 2026 and 2.9 per cent in 2027. This is off the back of the 4.1 per cent cash rate announced by the RBA after its March meeting.

The outlook said that the surge in global energy prices means that inflation pressures will persist for a longer period, based on its findings that inflation is expected to be higher in 2026 than previously projected due to the conflict.

Mathias Cormann, secretary-general of the OECD, said: “The energy supply shock from the evolving conflict in the Middle East is testing the resilience of the global economy.”

“We project global growth will remain robust, but it will be slower than the pre-conflict trajectory, with significantly higher inflation.”

He noted that any policy measures to cushion the impact of energy price hikes should target those most in need, be temporary and preserve incentives to save energy.

The outlook said that over the medium term, improving energy efficiency and reducing dependency on fossil fuel imports could lower exposure to future supply shocks caused by geopolitical tensions.

Broader risks to global supply chains

The outlook expected a decline in future energy prices, assuming that current supply disruptions would be limited in 2027 and ease over time.

It emphasised that a longer-lasting closure of oil and gas production facilities in the region, or persistent disruption to exports through the Strait of Hormuz, could exacerbate impacts on energy prices, inflation expectations and future growth.

“The conflict also poses broader risks to global supply chains. Fertilisers are a particular risk, with Persian Gulf states accounted for 34 per cent of the world’s urea exports and around 20 per cent of diammonium phosphate and anhydrous ammonia exports in 2024,” the outlook said.

“LNG is an important input to nitrogenous-based fertilisers, and the Gulf states also produce about half of the world’s sulphur exports, which are used in the manufacture of fertilisers as well as other industrial products.”

“Fertiliser prices have risen sharply, with urea prices up by over 40% since mid-February. This will have adverse implications for crop yields and global food prices in 2027 if sustained. Brazil, India, Australia and South Africa all source a relatively high share of key fertiliser inputs from the Middle East.”