OECD: Iran war will spare no major economy — UK most exposed now

The Organisation for Economic Co-operation and Development (OECD) said in its 26 March interim Economic Outlook that the conflict centred on Iran is testing the resilience of the global economy and that no major economy will be immune to its effects. The OECD highlights that energy supply disruptions and higher commodity costs are now material downside risks to growth and upside risks to inflation.

The report’s scenarios show that closures of shipments through the Strait of Hormuz and damage to energy infrastructure have driven a surge in oil and gas prices; a stress scenario where energy prices rise roughly 25% in the first year would lower global GDP by about 0.5 percentage points by the second year, while lifting inflation by about 0.7 percentage points in year one and 0.9 points in year two. For the United Kingdom, OECD projections were revised down: 2026 growth is projected at 0.7%, a 0.5 percentage point downgrade from prior estimates, signalling particular vulnerability among advanced economies.

Markets reacted swiftly to the shock: energy benchmarks and European equity indices experienced sharp moves, with London markets among the worst hit as investors priced in higher costs and growth uncertainty. Media and market reports noted sizeable intraday falls in the FTSE and marked moves in UK gas and Brent crude quotes, while central banks and fiscal authorities face pressure to balance inflation control and targeted support.

In a broader context the OECD highlights that elevated energy prices come when inflation is still above target in several large economies, increasing the risk that monetary policy may need to remain restrictive for longer. The institution recommends timely, well-targeted fiscal measures to protect the most vulnerable households and viable firms, while avoiding blanket policies that could exacerbate supply shortages. Policy credibility and clear exit plans are emphasised to prevent second-round inflation effects.

Market analysts say the outlook hinges on the duration of the conflict and the scale of energy market disruptions. If supply channels reopen quickly and prices ease, the shock to activity could be limited; if not, the combination of higher inflation and weaker growth could prompt more persistent repricing in financial markets and force tougher policy trade-offs for countries like the UK that are relatively energy-dependent. Investors are advised to monitor energy price trajectories and sovereign and corporate balance-sheet resilience.