The Organization for Economic Co-operation and Development (OECD) announced on Thursday that it has lowered its growth forecast for the Eurozone, pointing to the impact of the ongoing war in the Middle East on energy prices. The growth forecast for the Euro area has been adjusted to 0.8%, with similar reductions in growth expectations for the region's largest economies, Germany and France, also set at this figure.
The organization has also raised its inflation forecast for the Eurozone by 0.7 percentage points to 2.6%, while global growth expectations remain unchanged at 2.9% for this year.
Details of the Announcement
In its report, the OECD emphasized that rising energy prices and instability in the Middle East will lead to increased costs and decreased demand, offsetting the benefits of strong investments in technology and production. It warned that high inflation may prompt a response from the European Central Bank soon if it perceives that the inflation target of 2% is at risk.
Traders have increased their bets on a rate hike by the European Central Bank next month in an attempt to curb the anticipated rise in inflation. However, ECB President Christine Lagarde confirmed that the Eurozone is in a much better position to absorb shocks compared to when Russia invaded Ukraine.
Context and Background
Before the escalation of the conflict in the Middle East, global growth forecasts indicated a positive outlook, with growth potentially being 0.3 percentage points higher had the situation not escalated. Nevertheless, the report assumes that energy disruptions will begin to subside starting mid-2026, despite warnings of uncertainty surrounding the conflict.
The report also noted that the prices of urea, one of the main nitrogen fertilizers, have risen by more than 40% since mid-February, which could negatively impact crop production in 2027.
Consequences and Impact
The OECD expects that a prolonged period of high energy prices will lead to a significant increase in business costs and rising consumer inflation, which will have negative consequences for growth. The United States, facing midterm elections in November, is expected to perform better than other regions this year, with growth forecasts for the U.S. economy adjusted to 2% in 2026.
While growth in the U.S. is expected to slow to 1.7% in 2027, strong investment in artificial intelligence is anticipated to gradually offset this slowdown through a decrease in real income growth and consumer spending.
Impact on the Arab Region
These forecasts hold particular significance for the Arab region, where many countries rely on energy exports. Rising energy prices may affect inflation rates in Arab countries, potentially leading to increased economic and social pressures. Investments in renewable energy and energy efficiency may become more critical under these circumstances.
In conclusion, the current situation necessitates a concerted effort from both international and local stakeholders to address the economic challenges arising from geopolitical conflicts, with a focus on effective strategies to mitigate the impact of rising prices on citizens.