The World Bank expects economic growth in the Middle East to slow to 1.8 per cent this year as a result of the Iran war, warning the fallout can result in long-term “scarring”.
The figure is far lower than the estimated 4 per cent growth recorded last year, the Washington-based body said in its regional economic update on Wednesday.
"Even if the conflict were truly to stop today ... the closures of refineries, the destruction of infrastructure, the displacement of people, will carry long-term costs no matter what these have happened," said Roberta Gatti, the World Bank's chief economist for the Middle East, North Africa, Afghanistan and Pakistan.
The consequences of the war will remain even if the Strait of Hormuz is reopened immediately, she added, and the long-term costs "will need to be addressed urgently".
The World Bank now projects real gross domestic product in the Gulf to grow by 1.3 per cent this year, down from a 4.4 per cent expansion last year.
Ms Gatti said the reduction in oil and gas volumes was "very consequential" for Gulf countries, particularly those with less diversified economies.
"Then there are other effects coming from different channels. But at the moment, the oil and gas drops in quantity are the ones that take the lion's share of this impact," she added.
Qatar and Kuwait – where attacks on energy sites caused a significant disruption globally – could face a contraction this year, with the bank forecasting their economies to shrink by 5.7 per cent and 6.4 per cent, respectively, down from previous growth forecasts of 5.3 per cent and 2.6 per cent.
The economy of Saudi Arabia, the Arab world's biggest, is now projected to grow 3.1 per cent in 2026, down from 4.3 per cent. Growth for the UAE, the second largest, is now down to an estimated 2.4 per cent from 5.1 per cent. Bahrain and Oman are forecast to grow 1.3 per cent and 2.4 per cent, down from 3.1 per cent and 3.6 per cent, respectively.
Attacks by the US and Israel on Iran, which began on February 28, led to Tehran retaliating with strikes on US assets and energy infrastructure across the Gulf.
A two-week ceasefire announced by the US and Iran on Wednesday led to a surge in regional markets.
Tehran has also agreed to open the Strait of Hormuz, the waterway through which a fifth of the world's oil vessels pass, after effectively blocking it since the start of the war. The 39-day closure, along with air strikes on energy infrastructure, led to a surge in oil and gas prices, with global ramifications.
"This has triggered what we economists would really see as a textbook supply shock," Ms Gatti said.
The report's authors cautioned that a broader set of economies face “indirect but potentially significant spillovers”, including inflation pressures, declining tourism and remittance incomes, and weakened investor confidence.
The World Bank also warned that the conflict would leave deep wounds for vulnerable countries. Had the war not taken place, it added, income per capita in affected nations could have grown by an average of 45 per cent more over the next seven years.
"Conflict is development in reverse," Ms Gatti said.
Oil prices surged during the war, with Brent, the benchmark for two thirds of the world’s oil, hitting nearly $120 a barrel last month. While prices fell sharply on Wednesday – Brent was down nearly 15 per cent at $92.97 a barrel at 10.52am UAE time – the impact has already been felt in many economies globally.
Societies in net oil-importing nations, especially in Asia, have been hit especially hard.
The World Bank said “inflationary consequences” will ripple outward globally if energy prices remain elevated, and the pressure is already more pronounced in Europe and Asia than in the US, being a net oil exporter and self-sufficient in natural gas.
In contrast, a higher bill for oil importers can widen current account deficits and feed into production costs, which often are passed on to consumers, the report said. The inflationary pressures may force central banks to keep interest rates higher for longer than markets had expected.
"The whole world has been hit by massive geopolitical uncertainty," Ms Gatti said.
