How the risk of Middle East war is pulling the global economy back into the “energy shock” era

How Middle East War Risks Are Pulling the Global Economy Back Into the “Energy Shock” Era

The OECD’s latest assessment is not merely a short-term warning about geopolitical tensions; it is a reminder to global markets that after years of high inflation, rate hikes, supply-chain restructuring, and fiscal pressure, the world economy has still not fully escaped the cycle logic of an era dominated by energy shocks.

If the Middle East conflict is only a brief disturbance, and oil and gas supplies gradually recover after the third quarter of this year, the global economy may still be able to maintain a relatively mild slowdown path. The OECD’s baseline scenario shows global growth falling to 2.8% in 2026 after 3.4% in 2025, before rebounding to 3.1% in 2027. But if the conflict continues into next year, global growth could drop to 2.1% in 2026 and 1.8% in 2027, which would return the world economy to a more crisis-like state of vulnerability.

This divergence matters because it reveals the most fundamental structural problem in the global economy today: growth is not evenly distributed, and inflation is not converging in sync. Energy prices remain the key variable linking geopolitics, monetary policy, trade flows, and capital allocation.

Energy shocks are not a return to the past, but a return to a more fragile present

Unlike the 1970s, today’s global economy is not facing an oil-price shock in an environment of high growth, high inventories, and strong wage bargaining. On the contrary, the world economy is in a cycle of low growth, policy divergence, and higher debt burdens.

This means the same magnitude of energy-price increases could bring more complex consequences:

• For households, real income is further eroded, and consumption recovery is hindered;
• For businesses, cost pressures and pricing power diverge by sector;
• For central banks, once inflation expectations rise again, room for rate cuts shrinks;
• For fiscal authorities, energy subsidies, defense spending, and debt interest may all crowd out budgets at the same time.

The OECD estimates that if the energy disruption persists, global inflation could rise by an additional 0.4 percentage points in 2026 and another 1.3 percentage points in 2027. These figures may seem modest, but against a backdrop of globally elevated interest rates and generally higher debt levels, an additional inflation shock would amplify policy constraints.

This is also why energy has never been just an energy issue. It quickly evolves into an interest-rate issue, an exchange-rate issue, a fiscal issue, and ultimately a growth-model issue.

The central bank dilemma: a return of inflation delays easing, but slowing growth calls for relief

The OECD’s judgment points out that if the shock becomes prolonged, central banks may be forced to raise interest rates by 0.5 to 0.75 percentage points in the short term. Behind this statement lies the classic dilemma of modern monetary policy: faced with a supply-side shock, central banks cannot truly “solve” the problem, yet they must bear responsibility for second-round inflation risks and unanchored expectations.

This means two policy paths will exist simultaneously: 1. If the shock is short-lived, the central bank can still proceed with cautious easing at its existing pace. Under the baseline scenario, the OECD expects G20 inflation to peak at 4% this year and ease to 3.1% next year, with interest rates largely unchanged this year and rate cuts likely to emerge next year.

2. If the shock persists, monetary policy will shift back toward a longer period of “higher rates for longer.” This would not only raise financing costs, but also dampen the recovery in asset prices in real estate, industrial investment, and highly leveraged sectors.

In other words, what is truly changing is not the interest-rate decision at a single meeting, but the market’s pricing of the endpoint of the easing cycle. Over the past cycle, global assets have grown accustomed to a path of “inflation falls — central banks ease — risk assets reprice.” If the energy shock pushes inflation back up, markets will have to accept a longer plateau of elevated interest rates.

Growth divergence is shifting from cyclical differences to structural differences

The OECD’s regional assessment also points to a deeper trend: the global economy is no longer responding to shocks in a uniform way, but is increasingly dependent on each economy’s energy mix, fiscal capacity, industrial composition, and external financing conditions.

The United States: a net beneficiary of energy, but with consumption under pressure

Under the baseline scenario, U.S. growth is expected to slow from 2.1% in 2025 to 2.0% in 2026, and then to 1.8% in 2027. But the U.S.’s relative resilience stems from a long-standing fact: as a major energy producer, the United States can benefit to some extent when oil and gas prices rise, partially offsetting the hit to household purchasing power.

That does not mean the U.S. is fully immune. Higher energy prices would still squeeze consumption among low-income households and transmit more broadly through import costs, transportation costs, and corporate profit margins. Still, compared with economies that are more dependent on energy imports, the U.S. is better able to internalize external shocks as part of industrial profits and fiscal revenue.

The euro area: weak growth, but defense spending and the labor market provide support

Euro area growth is expected to slow to below 1.4% this year, fall further to 0.8% next year, and then recover to 1.2%. This path shows that Europe’s economy is still operating in a pattern of low potential growth, weak manufacturing, and fiscal constraints.

Support for the euro area is no longer coming mainly from external demand, but more from labor market resilience, increased defense spending, and the ability of some member states to adapt through energy substitution and supply-chain restructuring. But this support is limited. If energy prices rise again, Europe will have to contend not only with imported inflation, but also with further pressure on budgetary space.

The United Kingdom: financial conditions and global trade are the key variables

UK growth is expected to slow to 0.9% this year and recover to 1.1% in 2027. This reflects the economy’s high sensitivity to changes in external trade and financial conditions. If global trade continues to be disrupted by energy and geopolitical risks, the UK recovery will be difficult to achieve through domestic demand alone.

China: energy buffers and property drag coexistOECD expects China’s growth to be 5.0% in 2025, then slow to 4.5% in 2026 and 4.3% in 2027. One important feature of China is that it has relatively ample energy reserves, which helps reduce its immediate exposure to oil price shocks. But at the same time, the real estate slump is still weighing on domestic demand.

More notably, China’s exports are expected to benefit from lower U.S. tariffs and a more competitive technology sector. This suggests that, amid the global reorganization of trade, manufacturing and technology exports are becoming a growth buffer for some Asian economies. In other words, global demand has not disappeared; it is being redistributed toward regions with stronger industrial competitiveness and supply-chain positions.

Japan: Dual pressure from energy and trade, with fiscal issues re-emerging

In the OECD’s wording, Japan may be one of the economies hit hardest. Growth is expected to fall from 1.1% in 2025 to 0.6% in 2026, with only a slight rebound to 0.8% in 2027. Japan’s dependence on Middle Eastern energy and trade routes makes it more vulnerable to disruptions in global shipping and energy prices.

But Japan’s problems do not stop there. As interest rates rise, the OECD also stresses that Tokyo needs a “clear and credible” medium-term fiscal consolidation plan. This is crucial: when a long-term low-rate economy moves into a higher-rate environment, fiscal sustainability quickly becomes the core of macro policy, rather than merely an accounting budget issue.

Trade is shifting from an efficiency logic to a security logic

The OECD also notes that global trade growth will moderate after a strong 2025, though goods and investment related to AI, especially in Asia, will still provide support.

This sentence reveals the current dual-track nature of the trade system:

• One track is still driven by technological expansion, with AI hardware, computing equipment, advanced manufacturing, and related capital expenditure continuing to support cross-border demand;
• The other track is weighed down by geopolitical tensions, energy risks, and tariff frictions, with the efficiency logic of globalization being partly replaced by a security logic.

Therefore, future trade growth may no longer depend on “who can produce the cheapest,” but rather on “who can supply steadily, switch quickly, and withstand shocks.” This will encourage more inventory rebuilding, regionalization of supply chains, and dual sourcing of critical goods.

In other words, global trade has not ended, but it is changing how it is organized.

Capital flows will tilt more toward “shock-resistant assets” and resource-rich tailwinds

If the energy shock persists, the market response will not be limited to oil and natural gas prices; it will spread more broadly through exchange rates, interest-rate differentials, and risk premia.

In general, currencies of energy-importing countries will come under pressure, while assets in resource-exporting countries may receive support. The U.S. may attract capital inflows in this cycle by virtue of its energy advantage and relatively resilient growth outlook; meanwhile, some Asian and European economies may face higher financing costs due to external balance pressures, expectations of renewed inflation, and downward growth revisions.

For emerging markets, the risk lies especially in a triple overlay: 1. Oil price increases raise the import bill; 2. The U.S. dollar and global interest rates remain elevated, constraining capital inflows; 3. Domestic fiscal space is insufficient to subsidize energy shocks on a large scale.

This is also why geopolitical conflicts often hit energy markets first, then spread along the exchange-rate and debt chains to broader emerging market assets.

Looking further ahead, the global economy is still shifting from “low-inflation globalization” to “high-friction reconfiguration”

Viewed in a longer cycle, what matters most about this OECD forecast is not the growth revision for any particular year, but the changing rules governing how the global economy operates.

Over the past two decades, globalization, low inflation, low interest rates, and the expansion of China’s manufacturing sector together shaped a relatively stable macro environment. Today, that combination is unraveling:

• Energy supply is more easily disrupted by geopolitical tensions;
• The trade system places more emphasis on resilience than on pure efficiency;
• Inflation is no longer a “tamed” variable;
• Central banks must repeatedly weigh supply shocks against slowing demand;
• Fiscal policy has less and less room to maneuver between defense, subsidies, and debt.

AI and technology investment may provide new sources of productivity for some economies, but they do not automatically remove the hard constraints of energy, trade, and fiscal policy. On the contrary, in an era when global capital places greater emphasis on safety margins, technological expansion and geopolitical risk often coexist: on one side is the investment boom in data centers, chips, and computing power; on the other is the re-politicization of energy, shipping, and industrial policy.

Conclusion: this is not an isolated shock, but a stress test for a new cycle

The reason the OECD’s warning is worth paying attention to is not whether it accurately predicts any single quarter’s data, but that it reminds markets that the global economy has entered a phase more susceptible to being reshaped by supply-side shocks.

If the war in the Middle East eases in the short term, global growth may still see a manageable slowdown; but if the conflict persists, inflation, interest rates, exchange rates, trade, and fiscal policy may all be forced to be reprioritized. At that point, the question will no longer be simply how much oil prices have risen, but whether the global economy can continue to rely on the old low-friction order to sustain growth.

In this sense, the current risk is not a simple cyclical fluctuation, but a stress test for the global macroeconomic system. It is testing who has an energy buffer, who has fiscal space, who can endure higher interest rates for longer, and who will be forced to adjust its growth model in the new global restructuring.