OECD Warns Prolonged Iran War Could Push Global Economy Into Recession
Summary
- The OECD said a prolonged Iran war could push some countries into recession and further slow global economic growth.
- The OECD said continued disruption in the Strait of Hormuz could drag global economic growth down to 1.8%% and sharply lift inflation.
- The OECD warned that with public debt already high, room for fiscal expansion and monetary tightening or easing is limited, while further increases in policy rates remain possible.
Forecast Trend Report by Period
The OECD has warned that a prolonged Middle East conflict could tip the global economy toward recession.
In its latest economic outlook published June 3, the Organization for Economic Cooperation and Development said the war involving Iran is already weighing on global growth. If the conflict persists, some countries could fall into recession and inflationary pressures could rise sharply.
The OECD said a prolonged Iran war could trigger one of the worst global economic slowdowns in the past 40 years, excluding the Covid-19 pandemic and the 2009 financial crisis. Under that scenario, global inflation would be 0.4 percentage point higher this year and 1.3 percentage points higher next year than previously forecast.
"The Middle East conflict has become the dominant factor shaping the global economic outlook," OECD Chief Economist Stefano Scarpetta said. "The global economy is coming under pressure again."
The Strait of Hormuz remains the key variable. If disruption there lasts through next year, global growth could slow to 1.8%, according to the OECD. Some countries could enter recession or face near-recession conditions. The organization also said investment in artificial intelligence could weaken.
The OECD said policy options may be limited. Fiscal expansion in major economies could be the main tool for cushioning the shock, but governments have little room to intervene because public debt is already high.
Central banks also face a dilemma. They may need to tighten policy to contain inflation, but excessive tightening could worsen the slowdown. In a milder shock scenario, some countries could raise interest rates before cutting them next year if inflation pressures ease.
If the Middle East shock lasts longer and inflation accelerates, most countries could raise policy rates by an additional 0.5 to 0.75 percentage point, the OECD said. Major central banks could then cut rates again next year if growth slows further.
Scarpetta said central banks could temporarily look through supply-driven inflation if inflation expectations remain anchored and second-round effects are contained. Still, a policy response may be needed if price pressures broaden or growth weakens sharply.
JOON HYOUNG LEE
gilson@bloomingbit.ioCrypto Journalist based in Seoul
