OECD maps two paths for global economy as Hormuz crisis drags on: slow recovery or outright recession

The Organisation for Economic Co-operation and Development has issued its starkest global outlook since the pandemic, presenting two diverging paths for the world economy in its June 3 Economic Outlook. Both scenarios assume the Middle East conflict will leave the global economy worse off than before the war, with slower growth and hotter inflation. The difference is one of scale.

The central scenario: a quick resolution

The OECD's more optimistic case assumes energy disruptions ease as talks move toward a durable peace. Under this path, global growth would slow to 2.8% in 2026 from 3.4% in 2025, only slightly below the 2.9% the organisation had projected in March. Growth would then rebound to 3.1% in 2027. G20 inflation would hit 4.0% this year before easing to 3.1% in 2027.

The energy shock and rising inflation are worsening the outlook for the global economy.

Even this relatively benign path carries pain. US inflation is forecast at 3.7% this year, well above the Federal Reserve's 2% target. Euro zone growth is cut to just 0.8% in 2026, with Germany at 0.7%. Greece, which imports 93% of its total energy supply, sees its inflation forecast nearly double to 4.2% and its growth trimmed to 1.9%. Ireland's economy is projected to contract by 1% in 2026, partly due to the unwinding of a front-loading of exports and higher energy prices.

The downside: a prolonged disruption

The second scenario assumes the conflict drags through much of 2027. Global growth would fall to 2.1% this year and 1.8% next year, levels the OECD describes as "extremely low outside of big global recessions such as the global financial crisis or the pandemic." The organisation warns this could push several economies to the brink of recession. G20 inflation could climb above 5%, driven by oil prices rising from near $100 a barrel to $115 on a sustained basis.

The conflict in the Middle East has become the dominant force shaping the global economic outlook.

Central banks would face a sharp dilemma. The OECD says the US Federal Reserve and peers would need to lift interest rates at least a half-point to contain inflation risks, even as growth crumbles. The report flags that blanket relief measures such as tax cuts and price caps weaken incentives to save energy and should be avoided.

The chokepoint at the centre

All scenarios trace back to the Strait of Hormuz, the narrow waterway linking the Persian Gulf to global energy markets. The conflict was triggered on February 28 by a joint Israeli-American attack on Iran, which led Tehran to effectively close the strait. Efforts to move beyond a fragile truce between Washington and Tehran faltered in recent days as Iran attacked a US military base in Kuwait in response to American strikes against military targets in southern Iran.

The vulnerability of our economies to one single chokepoint demonstrates the need for intensifying efforts to strengthen the resilience of supply chains.

The OECD notes that even after a peace deal, economic effects will linger for months as damaged infrastructure and transport routes are restored. The organisation calls for urgent investment to break dependence on imported fossil fuels.

The AI wildcard

Both scenarios play out against an AI-boosted economy, with the United States the clearest beneficiary. The OECD sees US growth near 2% this year, the strongest in the G7, on "enormous AI-related investment" and resilient spending by higher-income households. But the report flags a paradox: AI is tying more of the global economy to energy markets, semiconductor supply chains and critical industrial inputs, the very areas repeatedly rattled by the pandemic, multiple wars and geopolitical tensions. Should disruptions persist well into 2027, investment, including in energy-intensive AI, would weaken significantly.

Country-level impact

The pain is unevenly distributed. Economies most reliant on Middle East energy imports, much of Asia outside China, are hit hardest, with Persian Gulf output falling outright. Greece's current account deficit is projected to widen to 6.7% of GDP in 2026. Euro zone inflation hit 3.2% in May, up from 3.0% in April, according to Eurostat. Switzerland stands out with inflation of just 0.7%. The UK shares the highest G7 inflation rate with the US at 3.7%.

Greece faces a specific vulnerability as its Recovery and Resilience Fund disbursements, which rise from 2.6% of GDP in 2025 to 4.4% of GDP in 2026, begin to phase out. Gross fixed capital formation growth is projected to slow from 8.9% in 2025 to 7.1% in 2026 and further to 3.2% in 2027. Tourism remains a bright spot, with international arrivals expanding and booking rates broadly stable in early 2026.