OECD Forecasts Global Economic Strain from US-Israel War on Iran
The Organisation for Economic Cooperation and Development has issued a stark warning in its latest interim outlook, stating that the ongoing US-Israel war on Iran will test the resilience of the global economy. This conflict, which has led to the closure of the Strait of Hormuz, poses significant downside risks, including persistent oil supply disruptions and soaring energy prices that threaten to derail growth across multiple nations.
Inflation and Growth Forecasts Revised Downward
According to the Paris-based organisation, inflation across G20 countries is projected to reach 4% through 2026, a sharp increase of 1.2 percentage points from December forecasts made prior to the escalation of hostilities. The OECD has downgraded growth expectations for the Euro area, the UK, and South Korea by 0.4 to 0.5% for this year compared to earlier predictions.
While energy exporters like the US and Australia may be less affected, the global crude oil benchmark has surged to $104 a barrel, marking a 70% increase since the start of the year. This energy price shock has overshadowed the anticipated boost from the artificial intelligence investment boom, squeezing economic prospects worldwide.
Impact on Australia's Economy
Local economists are slashing Australia's growth forecasts in response to the conflict. Adelaide Timbrell, a senior economist at ANZ, highlighted that higher oil prices and climbing interest rates will significantly hamper growth. Australia's growth rate is now expected to drop to 1.3% in 2026, half of last year's rate and 0.5 percentage points lower than February predictions.
The war's effects are projected to linger into 2027, with ANZ forecasting real GDP growth of 1.8% next year, a material downward revision from the 2.2% anticipated before the conflict. Inflation is set to spike, reaching 4.9% by June and ending the year at 4.5%, far above previous estimates.
Expert Insights on Economic Shocks
Jo Masters, chief economist at Barrenjoey, described the situation as an inflation shock and a growth shock, with inflation being the primary concern. Despite households having some financial buffers, such as higher savings rates and additional mortgage payments, people will feel the pressure of rising prices on essentials like petrol, transport, and food.
Pradeep Philip, lead partner at Deloitte Access Economics, noted that Australia is entering a difficult period with rising unemployment and inflation, though not akin to 1970s stagflation. He emphasized that the official numbers may understate the real impact on daily living costs.
The OECD report cautions that prolonged disruptions in the Middle East could have more severe consequences than currently anticipated, underscoring the fragile state of the global economy amid geopolitical tensions.
