The OECD raised its 2026 global growth forecast to 2.9% on Wednesday, saying the world economy has absorbed the energy shock from the Iran war better than expected, but warned that rising bond yields and strained public finances threaten Europe's ability to protect workers and services through future crises.
The organization trimmed its 2027 forecast to 3%, citing persistent inflation and the risk of a prolonged conflict in the Middle East. Within the eurozone, Spain is expected to grow 2.6% in 2026 and 1.8% in 2027. The US is now projected to grow 2.2% this year and the eurozone 1%, both up 0.2 percentage points from earlier estimates. Japan's forecast rose by the same margin to 0.8%. China's projection was left unchanged at 4.5%, and the G20 together is expected to expand 3.1%.
Energy Shock Absorbed — For Now
The OECD said energy prices have soared since the US and Israel launched strikes on Iran in February, but that sizeable oil inventories, extra supply from producers outside the Gulf and discretionary government support measures softened the blow. Broader financial conditions, including rising stock markets and continued access to credit, have remained supportive. Heavy investment in AI has bolstered production and trade, and the organization said it could yet deliver stronger growth than projected.
But the report makes clear that Europe's fiscal space is narrowing. Central banks have begun raising interest rates to contain inflation driven by high oil and gas prices, which have pushed diesel and other fuel costs to multi-year highs. Headline inflation in G20 countries is projected at 4.1% this year, while the OECD expects it to reach 3% in the eurozone.
Borrowing Costs Surge Across Europe
Government bond yields in EU countries including Germany and France have climbed to multi-year highs, raising borrowing costs for countries already carrying heavy debts and deficits. In Europe, those higher borrowing costs, along with targeted, temporary energy support, are putting further strain on public finances. The OECD warned that rising bond yields underline the need for enhanced efforts to contain and reallocate government spending, improve public-sector efficiency and strengthen revenues to ensure longer-term debt sustainability and maintain the ability of governments to react to significant shocks.
The language is technical, but the stakes are social. Higher borrowing costs mean less room for investment in health, education, and climate adaptation. They mean austerity pressures return — not because governments want to cut, but because bond markets demand it. And they mean Europe's ability to respond to the next crisis — pandemic, climate disaster, or geopolitical shock — is being quietly eroded.
Risks Remain High
The OECD flagged a prolonged war, weather-related supply shocks from a very strong El Niño hitting harvests and food prices, and AI investment returns that could disappoint as key risks that could weaken growth. Each of these risks would hit ordinary households hardest — through food prices, energy bills, or job losses in sectors that fail to adapt.
Why This Matters:
The global economy has proven more resilient than feared, but resilience isn't the same as security. Europe weathered the energy shock with emergency subsidies and inventory luck — not structural reform. Now bond markets are tightening the screws, and governments face a choice: cut spending, raise taxes, or risk a debt crisis. The OECD's call for "enhanced efforts to contain and reallocate government spending" is a polite way of saying austerity is back on the table. For the centre-left, this is the core challenge: how to maintain public investment in a just transition, social protection, and climate adaptation when fiscal space is shrinking and the far right is ready to blame migrants and the EU for every service cut. Spain's strong growth offers a model — but only if the eurozone creates the fiscal rules to let it continue.