The OECD has presented several scenarios for the world economy: the gloomiest of them assumes the deepest recession in the last 40 years, not counting the COVID-19 pandemic and the financial crisis of 2009. Under such a scenario, global inflation would be 0.4 percentage points higher this year and 1.3 points higher in 2027, Bloomberg reports.
Price pressures and weakened demand will be felt for some time and could even intensify even if the Strait of Hormuz is reopened, the Paris-based organization said in its latest economic forecast. Even for the relatively quick normalization scenario, the OECD raised its inflation estimates for 2027 and only slightly adjusted the already weak growth forecasts announced in March.
“The conflict in the Middle East has become the dominant force driving the global economic outlook,” notes OECD chief economist Stefano Scarpetta. – “The global economy is once again under pressure.”
Difficult political decisions lie ahead
If the problem persists through 2027, global economic growth will fall to 1.8 percent, pushing some countries into or near recession, causing unemployment to rise, dampening investment – including in artificial intelligence – and increasing the risk of overvaluation in financial markets, the OECD said.
The severity of the consequences and the potential for them to worsen will make policy decisions particularly difficult.
Fiscal stimulus measures will be the main tool to combat stagnation, the OECD said, but governments will be severely constrained by high levels of public debt. The organization also warned that the broad economic support that many nations have already provided has the unintended consequence of increasing energy consumption in a supply-side environment.
But the picture will become even more complicated if the war drags on and inflation reaches higher projected levels. The OECD expects central banks in most countries to raise interest rates by 50-75 basis points in this case, before being forced to cut them again in 2027 as the negative impact of tight policy on economic growth intensifies.
