Oil prices have surged to unprecedented levels, with Brent North Sea crude trading above $105 per barrel. This sharp increase is attributed to the ongoing Middle East war, which has sent shockwaves through energy markets. The European Development Bank has forecast that sustained oil prices above $100 per barrel will dampen global economic growth and boost inflation.
The bank notes that a 10-per cent increase in the average oil price is typically associated with a 0.1 percentage-point decline in global growth. In this case, the prices of benchmark oil contracts have soared around 40-45 per cent since the start of the US-Israel conflict with Iran. Economies with high energy import bills are particularly exposed to the impact of rising oil prices.
The Organization for Economic Cooperation and Development has maintained its global growth forecast at 2.9 per cent for 2026, despite cutting its outlook for Europe. However, the OECD notes that global growth could have been 0.3 percentage points higher had the conflict not escalated. The World Trade Organization chief, Ngozi Okonjo-Iweala, has warned that the global trading system is experiencing the "worst disruptions in the past 80 years".
The European Development Bank's warning on the impact of sustained oil prices above $100 per barrel should be a wake-up call for policymakers. The forecast of a 0.4 percentage-point decline in global growth and a 1.5 percentage-point rise in inflation is alarming. The bank's chief economist, Beata Javorcik, has highlighted the ripple effects of the conflict on energy markets, supply chains, and financial conditions. This will undoubtedly strain government budgets, particularly in central Europe and sub-Saharan Africa. The OECD's decision to maintain its global growth forecast despite cutting its outlook for Europe suggests that the impact of the conflict is being underestimated.
