The Middle East conflict has become the dominant factor reshaping the global economic outlook, according to the OECD's June 2026 Economic Outlook. The report warns that without a durable peace settlement, world growth could fall to its weakest level in years, pushing several economies into or near recession. The US-Iran ceasefire remains under strain, with CNN reporting fresh Iranian attacks on Kuwait and Bahrain, and US strikes on new targets. Tensions between President Trump and Israel's Benjamin Netanyahu over the mission's direction have also been reported.
The OECD frames its projections around two scenarios due to the exceptional uncertainty surrounding the conflict's trajectory. In the more optimistic scenario, a time-limited disruption, energy prices ease gradually from mid-2026 in line with futures market expectations, with Gulf energy production and exports returning to pre-conflict levels from the third quarter. Under this path, global GDP growth slows from 3.4% in 2025 to 2.8% in 2026 before recovering to 3.1% in 2027. Inflation in G20 countries is projected to climb to 4.0% this year from 3.4% in 2025, then ease to 3.1% in 2027 as energy and food price pressures fade.
The picture darkens considerably under the prolonged disruption scenario, where supply disruptions persist well into 2027. The OECD projects global growth collapsing to just 2.1% in 2026 and 1.8% in 2027, with unemployment rising and investment—including in energy-intensive AI infrastructure—weakening substantially. Global inflation would be pushed higher by 0.4 percentage points in 2026 and 1.3 percentage points in 2027. The consequences would be global but could prove especially severe for developing economies with limited energy reserves, higher shares of energy and food in household consumption, constrained fiscal capacity, and weak social safety nets.
The report notes that the world entered 2026 on stronger footing than many had expected, supported by robust AI-related investment, easing trade tensions, and accommodative financial conditions. However, disruptions to shipping through the Strait of Hormuz and damage to energy infrastructure have triggered sharp price increases that are feeding through to inflation, eroding household confidence and weighing on business activity. For financial markets and advisors monitoring macro risks, the OECD flags several pressure points. Private credit and equity funds face increasing exposure risks, and the report calls for enhanced stress-testing that explicitly models both prolonged Middle East disruptions and potential sharp corrections in AI valuations. As FTSE Russell warned, narrow AI-led rallies can mask market fragility, and bond hedges may falter.
Banking sector linkages to non-bank financial institutions are growing in advanced economies, the report notes, underscoring the need for tighter regulatory oversight of less-supervised intermediaries. On monetary policy, the OECD says central banks can hold off on acting against the current supply-driven energy price spike as long as inflation expectations stay anchored and second-round effects remain contained. Under the prolonged scenario, however, rate rises of between 50 and 75 basis points in most countries would likely be necessary in 2026 to moderate inflationary pressures. Fiscal policy faces its own constraints. Many governments have already moved to shield households from higher energy costs, largely through broad-based measures, but the OECD cautions that untargeted interventions such as price caps and tax cuts weaken incentives to reduce energy use and carry significant fiscal costs at a time when public debt levels are already elevated.
For advisors, the OECD's scenarios underscore the importance of stress-testing portfolios for tail risks. As Western Alternative Strategies CIO warned, many advisors overpay for volatility hedging and underprepare for tail risks. The OECD's prolonged disruption scenario highlights the potential for a sharp correction in AI valuations, which could compound the impact of energy-driven inflation. The report also notes that private credit and equity funds face increasing exposure risks, and calls for enhanced stress-testing that explicitly models both prolonged Middle East disruptions and potential sharp corrections in AI valuations.
