Could US-Iran war trigger a global recession?
What's the story
The Organisation for Economic Co-operation and Development (OECD) has warned that a prolonged conflict in the Middle East could severely impact global economic growth. The Paris-based think tank's latest Economic Outlook, envisions a "prolonged disruption" scenario where no agreement is reached between the US and Iran until 2027. In this case, global GDP growth is projected to fall from 3.4% in 2025 to just 2.1% this year, pushing some economies into recession, especially emerging ones.
Economic impact
Energy shortages and rising costs
The OECD report also warns of potential energy shortages due to oil and gas shortages, which could lead to "enforced rationing" for businesses. It further predicts that the prices of fertilizers and other industrial inputs such as sulfur and helium could rise due to supply constraints. This situation could create challenges for policymakers who may have to raise interest rates quickly to combat rising inflation risks from surging energy and food prices.
Tech sector
Impact on AI investments
The OECD report warns that the long-running US artificial intelligence (AI) boom could be jeopardized. It notes, "The significant energy price shocks or energy shortages associated with the prolonged disruption scenario would increase datacentre operating costs and constrain the supply of critical hardware used in AI systems." This could further diminish the capacity and incentive for AI investment, resulting in weaker growth in economies currently benefiting from such investments.
Expert opinion
Developing economies at risk
Stefano Scarpetta, the OECD's chief economist, has described the Iran conflict as "the dominant force shaping the global economic outlook." He warned that its consequences would be global but could be particularly severe for developing economies with limited energy reserves and weak social safety nets. These countries typically have higher shares of energy and food in household consumption, constrained fiscal capacity, low private savings buffers, and more fragile currencies.
Peace prospects
Less catastrophic scenario
The OECD also outlines a less catastrophic scenario where progress toward a durable peace agreement leads to falling oil prices in the coming weeks and months. In this case, global GDP growth would be 2.8%, lower than last year but much better than the "prolonged disruption" case. It is expected to rise to 3.1% next year. However, in either scenario, corporate borrowing costs are likely to rise due to confidence damage.