Paris-based body warns that ‘economic prospects remain heavily dependent on durable resolution to conflict’ The global economy has withstood the strains of the Iran war better than first feared but its outlook is “heavily dependent” on a lasting resolution to the conflict, the Organisation for Economic Co-operation and Development (OECD) has warned.
In its interim economic outlook, the Paris-based body suggested global growth had been more resilient than expected when the US-Israeli war on Iran began in late February.
The OECD on Wednesday pointed to the release of global oil stockpiles, a sharp decline in energy imports by China and the switch to other fuels including coal as factors helping to cushion the economic impact of limited Gulf oil supplies.
However, it warned that the recent resurgence in oil and gas prices posed risks for the coming months.
“Global economic prospects remain heavily dependent on whether a durable resolution to the Middle East conflict is achieved,” it said.
In its quarterly forecast update, the OECD said it expects global economic growth to be 2.9% this year – a modest 0.1 percentage point upgrade from the 2.8% it forecast in June.
At the same time it has trimmed the outlook for next year slightly, from 3.1%, to 3%.
Oil prices fell back below $100 a barrel on Tuesday amid hopes of a potential agreement between the US and Iran, but the continued standoff between the two sides has sent energy costs soaring in recent weeks.
The OECD warned that while more oil supplies were expected to resume as hostilities eased, “renewed or more persistent disruptions could result in both higher inflation and weaker growth”.
It also identified the record-breaking El Niño weather system – expected to be the strongest in 1,000 years – as a “significant downside risk” to the global economy, warning that it could hit agricultural production and push up food prices.
Other such risks include a further increase in the yields, or interest rates, on government bonds, which have risen in response to fears of higher inflation, and a loss of market confidence in the value of AI companies.
The OECD said AI investment has helped to offset wider economic weakness, especially in the US economy.
“In the United States, countervailing forces are at work, with strong underlying momentum and further expansion of AI investment, but consumer spending that is increasingly constrained by declining purchasing power, softer labour force growth and depleted household savings,” it said.
Looking at the UK, the OECD has significantly cut its inflation forecast for this year, from 3.7% to 3.1%, after prices rose less dramatically than expected.
Economic growth for the UK is forecast at 1.1% for 2026, up from the 0.9% it had forecast in June and 0.7% in March, “with consumption expected to be supported by newly announced government support measures”. skip past newsletter promotion after newsletter promotion Growth is still expected to be weaker than the 1.4% reported last year and is forecast to dip slightly next year, at 1% – down from the 1.1% forecast in June.
In response, the chief secretary to the Treasury, Emma Reynolds, said: “Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience.
“We will face these challenges together and we are already giving families space to breathe.
We had the fastest growth in the G7 in the first half of the year and we are starting the big, long-term changes needed to create good jobs and growth in every postcode.” Andy Burnham announced a cut in VAT on electricity bills as one of his first policy measures on coming to power in July, and has suggested there may be more measures to give consumers “breathing space” in next month’s budget.
Burnham and his chancellor, John Healey, have seen UK borrowing costs rise sharply amid turmoil in global bond markets as ongoing conflicts have disrupted the oil supplies, driving up inflation.
The world’s advanced economies have been warned they need to take action to reduce their borrowing and bring down debt levels, at a time of surging government borrowing costs, according to the head of the International Monetary Fund.
Kristalina Georgieva told the BBC that global economic shocks had been “pushing debt levels up like a staircase not to heaven” despite governments taking “no action to contain that service cost. [It’s] time to take that action,” Georgieva said, adding that courage was needed by politicians to take the necessary steps.
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