If the Strait of Hormuz Is Blocked, Growth Could Fall to the 1% Range... OECD Warns

[Financial News, New York = Lee Byung-chul, correspondent】A warning has emerged that if the Middle East energy crisis drags on, the global economy could suffer a shock comparable to the Global Financial Crisis (GFC) or the COVID-19 pandemic. In particular, if the reopening of the Strait of Hormuz is delayed and energy supply disruptions continue through 2027, global growth could fall into the 1% range, and major central banks may be forced to raise interest rates again.
In its World Economic Outlook released on the 3rd local time, the Organisation for Economic Co-operation and Development (OECD) said that if the so-called long supply disruption scenario, in which Middle East energy supply chain disruptions persist, becomes reality, global growth will slow to 2.1% this year and 1.8% next year.
The OECD said such growth rates are "extremely low levels that are rarely seen except during major downturns such as the global financial crisis or a pandemic."
The outlook came as talks between the United States and Iran over a ceasefire have recently stalled. Tensions between the two countries rose again after Iran attacked a U.S. military base in Kuwait in retaliation for U.S. airstrikes on military facilities in southern Iran, and uncertainty has also increased over negotiations to normalize conditions in the Strait of Hormuz.
In its baseline scenario, the OECD assumed that the Middle East crisis would be resolved early. Under that case, global growth is expected to slow from 3.4% last year to 2.8% this year, before recovering to 3.1% in 2027.
The U.S. economy is also expected to slow. The OECD forecast that U.S. growth will ease from 2.1% last year to 2.0% this year. However, U.S. consumer price inflation is projected to reach 3.7% this year, far above the Fed's 2% target.
Under the baseline scenario, the OECD said the Fed and the Bank of England could keep policy rates unchanged for now. But it warned that the situation could change dramatically if the Middle East crisis drags on.
If supply disruptions persist for a long period, energy prices are expected to rise more than 50% above the levels currently reflected in futures markets. As energy and industrial raw material supplies from the Persian Gulf region tighten, the shock could spread across global manufacturing.
The OECD also identified the artificial intelligence (AI) industry as a new risk factor. AI data centers require enormous amounts of electricity, and the semiconductor industry also relies heavily on raw materials from the Middle East, meaning an energy crisis could hurt AI investment and the growth of advanced industries.
Stefano Scarpetta, the OECD's chief economist, said, "I hope we have not already entered the long supply disruption scenario," adding, "It is a very bleak scenario."
The OECD said major central banks may need to raise policy rates by an additional 0.5 to 0.75 percentage points to prevent a "second-round inflation effect," in which surging energy prices spread to wages and services inflation.
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pride@fnnews.com Lee Byung-chul, correspondent Reporter