A multi-country assessment of the 2026 Middle East conflict
In this paper, Warwick J. McKibbin, Marcus Noland, and Geoffrey Shuetrim use the G-Cubed model, a hybrid DSGE/CGE framework covering 12 production sectors and modeling bilateral trade and capital flows across countries. It features sticky nominal wages, heterogeneous households, and monetary policy governed by Henderson-McKibbin-Taylor rules . Two scenarios are simulated:
- A temporary 1-year shock (oil +66% to $120/bbl, LNG doubling, agricultural productivity −3%).
- A persistent 3-year shock where the same 2026 disruption tapers at half-size in 2027 and half again in 2028 .
Three shock types are applied: an energy supply reduction, a price wedge on Middle East energy imports, and a direct agricultural productivity hit in fertilizer-importing countries .
Findings
- The war reduces GDP and raises inflation across all advanced economies.
- The U.S. is least affected (1.2% below baseline), as it does not rely on Middle Eastern energy directly, though it still pays global prices.
- India, South Korea, Vietnam, and Thailand see GDP 2.8–3.2% below baseline due to heavy energy and fertilizer dependence.
- The MENA region suffers most, with GDP at least 12% below baseline alongside sharp inflation surges.
- Counterintuitively, the persistent 3-year scenario produces a smaller 2026 GDP decline than the 1-year scenario: markets anticipate the drawn-out slowdown, real interest rates fall more in 2026, and partially cushion the immediate shock.
- Emerging economies with large agricultural sectors are disproportionately harmed, as fertilizer shortages compound the energy price shock.
- The most affected U.S. sectors are transportation, agriculture, and nondurable manufacturing, all heavily reliant on energy and fertilizer inputs.
Global economic implications of the 2026 Middle East war
Authors: Warwick J. McKibbin, Marcus Noland, Geoffrey Shuetrim
From: Peterson Institute for International Economics
The distributional effects of energy and uncertainty shocks on Euro Area saving
Niccolò Battistini, Alina Bobasu, Rodolfo Dinis Rigato, and Hanno Kase examine how the war in the Middle East, by raising energy prices and consumer uncertainty, poses renewed risks to the euro area household saving rate, which had already remained elevated since 2024.
The authors use three complementary models:
- A Bayesian structural VAR, estimated on euro area data from Q1 1999 to Q4 2025, to quantify the historical relationship between terms-of-trade shocks, consumer uncertainty shocks, and the saving rate.
- ECB-BASE, the ECB’s semi-structural macro model, to assess aggregate effects on euro area GDP growth and HICP inflation.
- A Heterogeneous-Agent New Keynesian (HANK) model with trade and energy imports, to capture distributional effects across income groups.
Two scenarios are simulated: an adverse terms-of-trade shock (comparable to the 2022 energy shock) and a consumer uncertainty shock (comparable to the onset of the Russia-Ukraine war) .
Findings
- The two shocks have opposite effects on the saving rate: deteriorating terms of trade erode real income and lower the saving rate (by 0.3 pp at trough in early 2027), while rising uncertainty triggers precautionary saving, raising it (by 0.4 pp at peak in late 2027).
- On inflation and growth: the terms-of-trade shock raises HICP inflation by 0.4 pp but cuts growth only modestly (−0.1 pp); the uncertainty shock has negligible inflation effects but cuts growth more sharply (−0.3 pp).
- Distributional effects are starkly asymmetric: adverse terms-of-trade shocks are regressive as low-income households (bottom tercile) bear 54% of the consumption decline despite accounting for only 18% of steady-state consumption, since they lack savings buffers. Uncertainty shocks fall mainly on top-income households (63% of the consumption decline).
- If both shocks materialize simultaneously, as is plausible given the war, they reinforce each other on the demand side, creating a sizeable drag on growth even if the saving rate remains broadly stable, with an overall net upward pressure on inflation.
Save your energy: how the war in the Middle East could affect household savings and the economy
Authors: Niccolò Battistini, Alina Bobasu, Rodolfo Dinis Rigato, Hanno Kase
From: ECB
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