New forecasts lay out 2 rocky paths for global economy

The Iran war has divided the global outlook into two tracks:A modest slowdown if the conflict ends soon or a severe hit, with some economies near recession, if it drags on and the disruption deepens.Why it matters: Either path leaves the global economy worse off than before the war, with slower growth and hotter inflation. The scenarios determine the scale of the damage.It's the latest reminder of how a single chokepoint can upend the world economy, the same supply-side dynamic behind most of the past half-decade's inflation shocks.The AI investment boom that is helping offset that pain could leave the economy more fragile down the line, with its technology tying the world to those very chokepoints.What they're saying: "The conflict in the Middle East has become the dominant force shaping the global economic outlook," Stefano Scarpetta, the chief economist of the Organisation for Economic Co-operation and Development, or OECD, wrote in the Paris-based group's latest economic projections."The vulnerability of our economies to one single chokepoint demonstrates the need for intensifying efforts to strengthen the resilience of supply chains," Scarpetta said.Between the lines: The OECD's central scenario assumes energy disruptions ease as talks move toward a durable peace. The downside scenario has the conflict dragging through much of next year.By the numbers: In the first scenario, the group projects global growth at 2.8% this year, only slightly below the 2.9% projected in March — though absent the war, the OECD says, it would have upgraded growth.The downside would cut that to 2.1% in 2026 and 1.8% in 2027, hitting hardest the economies most reliant on Middle East energy — much of Asia outside China — with Persian Gulf output falling outright.G20 inflation is projected to hit 4% this year before easing to 3.1% in 2027; a prolonged war would boost that by an additional 0.4 percentage point this year and 1.3 points in 2027.The big picture: Both scenarios play out against an AI-boosted economy, with the U.S. the clearest beneficiary as it is more insulated from the energy shock.The OECD sees U.S. growth near 2% this year, the strongest in the G7, on "enormous AI-related investment" and resilient spending by higher-income households, before easing to 1.8% in 2027.Yes, but: AI is tying more of the global economy to energy markets, semiconductor supply chains and critical industrial inputs — areas repeatedly rattled by the pandemic, multiple wars and other geopolitical tensions."Should the disruptions persist well into 2027 … investment — including in energy-intensive AI — would weaken significantly, with increasing risks of financial market repricing," Scarpetta wrote.AI investment is exposed on three fronts, the OECD says: the power that runs data centers, the chipmaking fed by the Middle East and the trade routes that hardware travels."These effects could further reduce the capacity and incentive for AI investment, leading to notably weaker growth in those economies currently being boosted by AI-related investment and production," the OECD notes in the report.The intrigue: Major central banks, including the Federal Reserve, are in "wait-and-see" mode.But the OECD says that if the conflict drags on, interest rates in most economies would have to rise by as much as 0.75 percentage point to keep inflation expectations anchored, even as growth weakens.With central banks boxed in, the OECD says, the burden to cushion the economy "would fall mostly on fiscal policy," just as debt, aging and defense costs leave governments little room to maneuver.

The Iran war has divided the global outlook into two tracks:A modest slowdown if the conflict ends soon or a severe hit, with some economies near recession, if it drags on and the disruption deepens.Why it matters: Either path leaves the global economy worse off than before the war, with slower growth and hotter inflation.…

The Iran war has divided the global outlook into two tracks:A modest slowdown if the conflict ends soon or a severe hit, with some economies near recession, if it drags on and the disruption deepens.Why it matters: Either path leaves the global economy worse off than before the war, with slower growth and hotter inflation. The scenarios determine the scale of the damage.It's the latest reminder of how a single chokepoint can upend the world economy, the same supply-side dynamic behind most of the past…