OECD Issues Warning on Economic Effects of Prolonged Iran Conflict
On Thursday, the OECD raised alarms regarding the potential economic fallout from a drawn-out conflict in Iran. They predict that U.S. inflation could soar to 4.2% this year, which is notably the highest among G7 nations.
This warning stems from the ongoing blockade of the Strait of Hormuz by Iran, a crucial passage for the global oil and fertilizer supply chains. This situation, combined with tariffs implemented during President Trump’s administration, could exacerbate inflationary pressures.
The OECD highlighted the uncertainty surrounding the conflict’s duration, noting that sustained increases in energy costs could significantly affect business operations, lead to higher consumer price inflation, and ultimately hinder economic growth.
Inflation across the G20 nations is also projected to rise to 4%, an increase from 3.4% last year. Interestingly, the predicted rise for the U.S. alone is 1.6%, moving up from about 2.6% the previous year.
Additionally, if the disruptions in the Strait of Hormuz persist, American households may find themselves spending more on fuel, consequently cutting back on other expenditures, which would further slow growth.
The outlook for U.S. GDP growth indicates a decline to 2% in 2026, slightly down from 2.1% last year, with expectations of further reduction to 1.7% in 2027.
Before the onset of the Iran conflict, the OECD observed that global growth remained robust even amidst rigorous tariffs, benefitting from significant investments in technology like artificial intelligence and increased capital spending.
However, since the U.S. and Israel initiated military actions against Iran last month, global supply chain disruptions have caused spikes in gasoline prices and costs for fertilizers, metals, and essential industrial components, potentially impacting economic momentum and investment decisions.
Damage to critical energy infrastructure in the Middle East could lead to prolonged increases in energy prices, should the conflict persist, as repairs will require considerable time even in the event of an early resolution to hostilities.
The OECD remarked that “the Middle East conflict is testing the resilience of the global economy.”
Earlier this year, the organization anticipated global GDP growth at a slight increase, but now revisions suggest a slowdown to 2.9% in 2026, down from 3.3% last year, with a potential recovery of around 3% in 2027.
In terms of monetary policy, the OECD is forecasting the Federal Reserve will likely hold interest rates steady throughout 2026, while the European Central Bank may raise rates this year.
Following last week’s decision, where the Fed maintained interest rates between 3.5% and 3.75%, officials recognized the heightened uncertainty and cautiously anticipated one rate cut for the year, though they cautioned that higher inflation could indeed affect overall growth.
The OECD’s inflation predictions exceed the Fed’s, which estimates inflation at 2.7%, since the organization expects the economic impacts from the Iran conflict and tariffs to be more lasting rather than short-lived.
Moreover, the U.S. economy is contending with added pressures from a decrease in immigration rates due to the Trump administration’s stricter deportation policies.
The OECD advised that government strategies aimed at alleviating inflation must be “well targeted” towards both households and businesses.
