Iran Conflict and Strait of Hormuz Blockade Slash Global Growth Forecasts

Global growth forecasts have been sharply downgraded as the economic fallout from the Iran war and the blockade of the Strait of Hormuz reverberates through energy markets, threatening to tip some countries into recession. The Organisation for Economic Co-operation and Development (OECD) now expects the world economy to expand by just 2.8 per cent in 2026, down from 3.4 per cent last year, but in a worst-case scenario—where the conflict drags on and the strait remains closed well into 2027—growth could slump to 2.1 per cent this year and 1.8 per cent next. The gloomy assessment, released on Wednesday, reflects a year that began with unexpected resilience only to see those gains squandered after the outbreak of hostilities on 28 February.

The pain is not being felt evenly. While the eurozone as a whole is forecast to grow by a meagre 0.8 per cent, Spain stands out as a rare bright spot, its forecast lifted one tenth to 2.2 per cent on the back of strong domestic fundamentals. Analysts in Rome, by contrast, highlight Italy’s extreme vulnerability: the OECD cut its 2026 growth estimate to 0.5 per cent, citing heavy reliance on imported fossil fuels and a large manufacturing sector. Surging energy prices will fuel inflation, erasing what had been a fragile recovery in real wages, with only a modest uptick to 0.6 per cent expected in 2027 should the geopolitical fog lift. Britain, similarly, saw its 2027 outlook trimmed, with GDP growth easing to 0.9 per cent this year from 1.4 per cent in 2025.

Further east, the European Bank for Reconstruction and Development (EBRD) issued its own downbeat revision for 41 emerging economies, lowering its aggregate forecast by half a percentage point to 3.1 per cent. The damage is starkest in the Middle East itself: Lebanon and Iraq are now expected to contract by 2 per cent and 1.5 per cent respectively, with their forecasts slashed by six and five percentage points. Beata Javorcik, the EBRD’s chief economist, called the report “a story about the continuation of the energy shock,” a blunt acknowledgment that the war’s collateral damage extends far beyond the battlefield, hitting supply chains and industrial inputs from fertiliser to manufactured goods.

Looking ahead, the OECD warns that the outlook remains highly uncertain. Should the Strait of Hormuz remain blocked and energy infrastructures stay damaged, some economies could slip into outright recession or face acute energy shortages. The organisation now counsels that any fiscal support be “targeted at those who need it most and be temporary,” a recognition that governments face shrinking room for manoeuvre as borrowing costs rise. Viewed from Washington, the spectre of a prolonged Middle Eastern conflict invites comparisons with the oil shocks of the 1970s, but with global supply chains more integrated, the contagion risks are arguably greater. For the moment, the best-case scenario remains a rapid de-escalation; without it, the world may be bracing for a protracted period of subdued growth and resurgent inflation.