OECD warns of inflation, slow global growth in case of prolonged Middle East conflict

The apparel, footwear and textile industries are bracing for impact as the evolving conflict in the Middle East reshapes the global economic landscape. According to the OECD’s latest “Economic Outlook,” a severe energy shock is driving up inflationary pressures and stifling global growth — factors that directly threaten fashion supply chains, manufacturing costs and consumer discretionary spending.

Two likely scenarios

Given the volatile nature of the crisis, the OECD has mapped out two distinct paths forward, both of which demand immediate strategic pivoting from fashion executives and supply chain leaders: In Scenario 1, a time-limited disruption, energy production and trade in Gulf economies would progressively return to pre-conflict levels starting mid-2026. This would allow disruptions to gradually unwind, though the immediate sting to margins would remain.

Scenario 2, a prolonged disruption, is more dire: Current disruptions to energy production and exports would persist well into 2027. This scenario would affect the garment and textile industry as it assumes sustained high energy prices, intensifying risks of supply chain shortages, and a tightening of global financial conditions that could freeze capital investment.

“The global economy entered 2026 with robust momentum, but the outlook has weakened significantly since the start of the conflict in the Middle East, with effects likely to be felt for some time. The longer the disruptions last, the larger the economic and social costs become,” warned OECD secretary-general Mathias Cormann at the launch of the Economic Outlook on Wednesday.

“Any fiscal support that countries provide in response to the shock needs to be targeted towards those most in need and temporary, to avoid a further increase in public debt and preserve incentives to save energy. More broadly, countries need to lay the foundations for stronger growth and productivity by improving the business environment, enhancing skills and unlocking the benefits of AI and other transformative technologies,” he added, noting that structural agility and smart technological adoption will be vital to weathering the storm.

GDP growth projections and inflationary pressures

For fashion brands, slowing GDP growth translates directly to tighter consumer wallets. The OECD’s projections suggest a stark divergence depending on how long the conflict will last: In case of a time-limited disruption scenario, the OECD projects global growth slowing from 3.4 percent in 2025 to 2.8 percent in 2026 before picking up to 3.1 percent in 2027.

Looking at G20 countries, only India, Indonesia, China, Saudi Arabia, Argentina and Turkey would be above that project global average with 7.6, 5.1, 5, 4.5, 4.4 and 3.6 percent, respectively in 2026 and further growth in 2027. In North America, the United States’ GDP growth is projected at 2 percent in 2026 before slowing to 1.8 percent in 2027; Canada’s at 1.2 percent in 2026 and picking up again in 2027 to 1.7 percent while Mexico’s would more than double from 0.8 percent to 1.9 percent in 2027.

In the Euro zone, growth is projected to remain modest at 0.8 percent in 2026 before picking up to 1.2 percent in 2027. Below that average are Italy, France and Germany with a projected GDP of 0.5 , 0.7 and 0.7 percent, respectively, in 2026, with a slight increase to 0.6 percent and 0.8 percent for Italy and France in 2027 and a moderate increase for Germany to 1.1 percent. The UK’s GDP is projected at 0.9 percent in 2026 and 1.1 percent in 2027.

Under the prolonged disruption scenario, global growth would slow to 2.1 percent in 2026 and 1.8 percent in 2027, “leaving a lasting mark on many countries, especially in Asia, Europe and developing economies most vulnerable to the energy and food price shock,” sums up the OECD outlook.

Inflationary pressures would rise in both advanced and emerging market economies with the energy shock leading to higher commodity prices. Indirect effects would boost prices in general, especially for agricultural inputs and food. “In the time-limited disruption scenario, annual consumer price inflation in the G20 economies is collectively expected to rise to 4.0 percent in 2026, from 3.4 percent in 2025, before easing to 3.1 percent in 2027 as energy and food price pressures fade. Inflation would rise significantly higher in the prolonged disruption scenario,” concludes the OECD outlook.

What does that mean for the fashion industry?

The fashion sector is uniquely exposed to the inflationary pressures detailed in the report. Energy shocks act as a double-edged sword for the textile sector as they affect production costs: Synthetic fibre production (like polyester and nylon) is heavily dependent on petrochemicals, making raw material costs highly sensitive to oil price spikes. Logistics and freight is another affected area: Shipping costs are already on the rise as global trade routes adjust to the volatility, threatening margin-starved retail brands.

The inflation’s ripple effect would be felt In the best-case scenario, annual consumer price inflation in G20 economies is expected to climb to 4.0 percent in 2026 (up from 3.4 percent in 2025) before easing to 3.1 percent in 2027. Under a prolonged conflict, inflation would spike significantly higher. Higher food and energy prices mean apparel brands will be competing fiercely for a smaller share of the consumer's wallet.

For fashion and textile insiders, the message is clear: the era of predictable supply chains is on pause. To navigate the remainder of 2026 and 2027, brands must double down on efficiency. This means accelerating the adoption of AI for demand forecasting, optimising inventory to avoid costly overstock, and diversifying sourcing destinations to mitigate regional energy dependencies.