Energy shock is slowing growth

What's happened

The Iran war and the effective closure of the Strait of Hormuz have raised energy, fertiliser and transport costs and have slowed global growth forecasts. The OECD has cut near‑term growth projections; UNICEF and other agencies have reported soaring freight and rerouting costs that are delaying aid and worsening conditions in poorer countries. Central banks and governments are adjusting policy responses.

What's behind the headline?

What is happening now

• The OECD has downgraded global growth for 2026 and warned that a time‑limited disruption would slow growth to about 2.8% this year, with a worse, prolonged disruption cutting growth to near 2.1% and 1.8% in 2027. Inflation in major economies is running above previous forecasts.
• UNICEF and UN logistics officials are rerouting supplies and relying on air freight; shipping diversions are adding two to four weeks to voyages and some deliveries face delays up to six months.

Why it matters

• Higher energy and fertiliser prices will reduce public budgets and private investment, will raise costs for food and transport, and will hit lower‑income countries hardest because they spend larger shares of income on fuel and food.
• Aid agencies are spending more on transport, which is directly reducing the volume of lifesaving supplies delivered.

Who wins and loses

• Exporters of oil and LNG that can maintain flows will capture higher prices. Import‑dependent emerging markets, low‑income countries and humanitarian operations will lose the most.

Outlook and consequences

• If shipping through Hormuz remains restricted into 2027, global growth will weaken substantially, unemployment will rise, and investment—especially in energy‑intensive sectors—will fall. Governments will face pressure to target temporary subsidies to vulnerable households while avoiding long‑term fiscal strain.
• Longer disruption will force faster depletion of emergency oil inventories and will increase market volatility and insurance costs, which will further raise energy and freight prices.

Key policy response

• The OECD and multilateral agencies are calling for emergency demand‑restraint measures, coordination of strategic stocks and targeted fiscal support. Over the medium term, this will force accelerated investment in supply‑chain resilience and energy diversification.

How we got here

The conflict began after U.S. and Israeli attacks on Iran and Iranhas restricted shipping through the Strait of Hormuz, a vital route for about one‑fifth of global oil and LNG. That disruption has pushed energy and fertilizer prices higher, strained inventories and forced rerouting of ships around the Cape of Good Hope, lengthening delivery times and raising transport insurance and freight costs.

Our analysis

The OECD has issued the central economic assessment: its June Economic Outlook, cited by CNBC and the New York Times, projects global growth at 2.8% in 2026 under a time‑limited disruption and warns growth could fall to 2.1% under a prolonged scenario (CNBC; New York Times). The OECD's chief economist, Stefano Scarpetta, told the New York Times that uncertainty over energy and inputs such as fertiliser and helium is driving the downgrade. Reuters and The New Arab have relayed UNICEF's logistics warnings: Jean‑Cedric Meeus of UNICEF has said air‑freight capacity has tightened and rerouting around the Cape of Good Hope is adding two to four weeks to shipments, while some deliveries face delays up to six months (Reuters; All Africa; The New Arab). The Independent and Reuters have emphasised that poorer, fuel‑importing countries and Asian economies dependent on Gulf supplies will be hardest hit, quoting OECD Secretary‑General Mathias Cormann and the organisation's scenarios. The Guardian reported specific UK risks, noting localised diesel shortages and impacts on agriculture and tourism, and quoted Chancellor Rachel Reeves responding to the OECD. Direct quotes include: the OECD: "The evolution of the Middle East conflict remains uncertain, but its economic consequences are likely to be felt for some time even after its resolution" (New York Times); UNICEF's Meeus: "with every additional dollar UNICEF spends on transport, one less dollar goes to supplies for children" (All Africa; Reuters).

Go deeper

• How long will global oil inventories last if shipping stays restricted?
• Which countries face immediate diesel or fertiliser shortages?
• What relief measures are governments and agencies planning now?

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