The Organisation for Economic Cooperation and Development (OECD) has significantly revised its economic outlook, painting a more challenging picture for the global economy, particularly the eurozone. The organisation has lowered its growth forecast for the currency union, anticipating a more sluggish expansion than previously expected.
Eurozone Facing Slower Growth and Rising Inflation
The OECD has slashed its growth forecast for the eurozone by a notable 0.4 percentage points, now predicting a mere 0.8% expansion. This downward revision extends to the continent’s economic powerhouses, Germany and France, both of whom have also seen their growth prospects downgraded to 0.8%.
Compounding these concerns, the OECD has simultaneously raised its inflation forecast for the eurozone by 0.7 percentage points, projecting it to reach 2.6%. This uptick in inflation, coupled with subdued growth, raises the spectre of stagflation, a scenario where economic growth stagnates while inflation remains high.
The report highlights the dual impact of the ongoing Middle East conflict and surging energy prices. It states that the “energy price surge and the unpredictable nature of the evolving conflict in the Middle East will raise costs and lower demand, offsetting the tailwinds from strong technology-related investment and production, lower effective tariff rates and the momentum carried over from 2025.”
Monetary Policy on High Alert
The elevated inflation figures are putting pressure on the European Central Bank (ECB). Higher-than-expected inflation could prompt a swift monetary policy response, with the possibility of an interest rate hike as early as next month if the ECB perceives its 2% inflation target to be under threat. Traders are already factoring in this possibility, increasing their bets on an imminent rate increase by the ECB to curb anticipated inflationary pressures.
Despite these concerns, ECB President Christine Lagarde has sought to reassure markets, stating that the eurozone is in a “far better place to absorb the shock” compared to the period following Russia’s invasion of Ukraine.
The OECD’s report also notes that global growth had been performing “well” prior to the escalation of recent geopolitical conflicts. It estimates that global growth could have been 0.3 percentage points higher had these conflicts not intensified.
Global Economic Headwinds and Uncertainties
The report’s projections are contingent on a crucial assumption: that energy disruptions will begin to ease from mid-2026. However, the OECD issues a stark warning about the inherent uncertainties surrounding the ongoing conflicts.
“The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth,” the organisation cautions.
A specific concern raised is the price of urea, a key nitrogen-based fertiliser. The OECD points out that urea prices have surged by over 40% since mid-February, a development that could negatively impact crop yields in 2027.
United States Shows Resilience, China Faces Headwinds
In contrast to the eurozone’s outlook, the United States is expected to demonstrate greater resilience. The US economy, facing significant mid-term elections in November, is projected to outperform other regions this year. The OECD has revised its growth forecast for the US upwards by 0.3 percentage points to 2% for 2026, following an anticipated 2.1% growth in 2025.
However, the US economy is then expected to slow to 1.7% in 2027, a downward adjustment of 0.2 points from previous forecasts. This slowdown is attributed to the gradual offset of strong artificial intelligence (AI)-related investment by a deceleration in real income growth and consumer spending.
Meanwhile, China’s economic growth is still anticipated to reach 4.4% this year, with a projected 4.3% in 2027. The OECD attributes this slowdown to several factors, including the phasing out of public subsidies for consumption, rising energy import prices, and the ongoing adjustments within its real estate sector.
Policy Recommendations for a Stable Future
To navigate these challenging economic waters and mitigate the impact of future energy shocks, the OECD has put forth several policy recommendations. The organisation advocates for “policies that improve domestic energy efficiency and lower reliance on imported fossil fuels.”
Furthermore, the OECD stresses the importance of international cooperation, suggesting that “agreements to ease trade tensions and deepen trade relations would improve policy certainty and strengthen the prospects for sustainable growth.” Such measures are seen as crucial for fostering a more stable and predictable global economic environment.
