PARIS - The fate of the global economy hinges on the conflict in the Middle East that has already stifled growth and could yet trigger recessions and significantly stronger inflation, the OECD said on June 3.Global economic growth is now forecast to slip to 2.8 per cent in 2026, from 3.4 per cent in 2025. This is if Gulf exports of oil and gas return to pre-conflict levels in the third quarter of the year, the group of 38 industrialised countries said in its quarterly update.Previously the OECD had forecast full-year global growth of 2.9 per cent.But if the Iran war continues into 2027, global growth could slow to 2.1 per cent, the OECD said - well below the average annual growth of 3.4 per cent seen from 2013 to 2019, before the Covid pandemic.“The longer the disruptions last, the larger the economic and social costs become,” the group’s chief economist Stefano Scarpetta said in the report.Many countries would risk falling into recession, he noted, and a drop in investment spending -- “including in energy-intensive AI” - would likely push up unemployment.Sustained high prices for energy as well as fertiliser and other key products from hydrocarbon production in the Gulf would weigh especially hard on developing countries that have “higher shares of energy and food in household consumption”.Even if the war sparked by US and Israeli strikes on Iran in late February ends in the coming weeks, the OECD forecast global inflation rising to 4 per cent in 2026 from 3.4 per cent in 2025.In this “time-limited disruption scenario”, the group expects US growth to slow to 2 per cent this year and 1.8 per cent in 2027, after growing 2.1 per cent in 2025.In the eurozone, where many countries are highly dependent on energy imports, GDP growth will slump to 0.8 per cent this year after 1.4 percent last year, assuming a Mideast ceasefire is secured in the coming weeks.The latest assessment from the club of advanced economies is a stark warning of what’s at stake for other countries the world over if the US and Iran can’t find a path to deescalation. Predicting the extent to which that is possible is hazardous, as optimism on a deal on opening Hormuz is repeatedly punctuated by renewed threats of attacks and diplomatic setbacks.The OECD said central banks face challenges weighing the need for tighter policy to rein in inflation while avoiding unnecessary economic harm. In its milder scenario, it expects some interest-rate increases followed by cuts in 2027 as price pressures retreat. But the picture becomes more complex if the disruption is prolonged and inflation reaches the more acute projections. The OECD expects policy rates would then likely rise by 50 to 75 basis points in most countries, only to be reduced again in 2027 as the drag on growth intensifies. If there is severe tightening of market conditions, the OECD said central banks may have to reconsider further reductions in holdings of sovereign bonds acquired in past crises and even reboot quantitative easing or – in the case of the ECB – long-term refinancing operations. “Central banks can look through the supply-driven rise in prices as long as inflation expectations remain well anchored and second-round effects are contained,” Scarpetta said. “However, a policy response may become necessary if price pressures broaden, or if growth weakens significantly.” BLOOMBERG, AFP