The OECD said Thursday it was cutting its eurozone growth outlook and forecasting higher inflation for 2026 after the Middle East war caused energy prices to skyrocket.
The Organization for Economic Cooperation and Development lowered its growth forecast for the currency union by 0.4 percentage points to 0.8%, with the continent's top two economies, Germany and France, also revised down to 0.8%.
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The organisation also raised its inflation forecast for the eurozone by 0.7 points to 2.6%, while the global growth forecast remains at 2.9% for this year.
"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," it said in the report.
Higher than expected inflation could trigger a monetary policy response as soon as next month, if the European Central Bank sees that the 2% inflation target is in danger.
Traders have raised their bets on the ECB hiking interest rates as soon as next month to tame an expected surge in inflation.
However, ECB chief Christine Lagarde saidon Wednesday that the eurozone is far better placed to absorb the shock than it was when Russia invaded Ukraine.
In their current report, the OECD noted that global growth had been holding up "well" before the war and that it could have been 0.3 percentage points higher had the conflict not escalated.
The report assumes that energy disruptions will ease starting in mid-2026, though it warned of the uncertainties surrounding the war.
"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," it said.
The organisation cites, in particular, the price of urea as one of the main nitrogen-based fertilisers, which has risen by more than 40% since mid-February, which could reduce crop yields in 2027.
The United States, which is facing high-stakes mid-term elections in November, is expected to fare better than other regions this year.
Following growth of 2.1% in 2025, the forecast for the US economy has been raised by 0.3 percentage points to 2% in 2026.
It is then seen slowing to 1.7% in 2027, down 0.2 points from the previous forecast, as strong AI-related investment is gradually offset by a slowdown in real income growth and consumer spending.
Chinese growth is still expected to reach 4.4% this year, then 4.3% in 2027.
The OECD attributes the slowdown to the end of public subsidies for consumption, rising energy import prices, and the ongoing adjustment of the real estate sector.
To mitigate further energy shocks, the OECD called for "policies that improve domestic energy efficiency and lower reliance on imported fossil fuels".
It also said that "agreements to ease trade tensions and deepen trade relations would improve policy certainty and strengthen the prospects for sustainable growth".
