The International Monetary Fund on Tuesday lowered its growth forecast for the Middle East as the Iran war strains global energy supply chains.
In its latest World Economic Outlook, the IMF expects growth in the Middle East and Central Asia of 1.9 per cent this year, down by 2 percentage points from its estimate in January. The region's growth is expected to rebound to 4.6 per cent next year, assuming energy production and transport return to normal levels in the coming months.
“The dominant force for them is the fact that they are in the path of war right now, and that leads to a very significant downgrade and sometimes even negative growth rates for a number of them,” IMF chief economist Pierre-Olivier Gourinchas said of the countries concerned.
Oil prices have surged more than 30 per cent since the war began on February 28, while natural gas prices have been volatile following an Iranian air strike on Qatar's Ras Laffan Industrial City.
While higher energy costs associated with supply shocks typically favour exporters, damaged infrastructure across the Middle East and the closure of the Strait of Hormuz mean fewer options for exporting energy.
“Either they cannot export their energy … or it's trapped because the facilities have been destroyed, or it's trapped inside the Gulf, and it cannot come out,” Mr Gourinchas said.
Saudi Arabia and the UAE received downwards revisions for 2026, although growth of 3.1 per cent is expected for both this year before expansion of 4.5 per cent and 5.3 per cent in 2027, respectively. For Oman, growth of 3.5 per cent and 3.4 per cent is forecast for 2026 and 2027, respectively.
Economies with badly damaged infrastructure and less access to alternatives to export routes, such as Bahrain, Iran, Iraq, Kuwait and Qatar, are forecast to contract in 2026. The IMF estimates Qatar's economy will shrink by 8.6 per cent this year, before swinging to the same level of growth in 2027. Bahrain and Kuwait's economies are projected to contract by 0.5 per cent and 0.6 per cent before rebounding by 4.5 per cent and 2.8 per cent, respectively, next year.
Global resilience tested
The fund also downgraded its forecast for the global economy and flagged a possible downturn.
The IMF estimates the global economy will slow to 3.1 per cent growth in 2026 – 0.2 percentage points lower than its January forecast – from 3.4 per cent last year, before rebounding to 3.2 per cent in 2027. The fund also raised its forecast for global inflation this year and next, at 4.4 per cent and 3.7 per cent, respectively.
Tuesday's oil shock has parallels with the 1973 embargo, when Opec producers cut off exports to the West and crude prices quadrupled. If the current conflict were now to end permanently, the accumulated loss of oil would be 2 per cent of global consumption – similar to the 1970s oil crisis, Mr Gourinchas said.
The IMF's flagship economic wellness check comes a day after US President Donald Trump implemented a naval blockade on the Strait of Hormuz after talks between the US and Iran in Islamabad failed to achieve a lasting ceasefire.
IMF chief economist
“We've seen discussions over the last few days, ceasefire, no ceasefire, blockade, other blockade,” Mr Gourinchas said. “So we don't know and the shock could get much bigger.”
The latest outlook underscores the drag the Iran war is expected to have on the global economy, offsetting gains made by artificial intelligence. The IMF said it would have upgraded its forecast for global growth this year were it not for the war.
The latest shock is the most recent test of the global economy's resilience, the fund said, after it weathered the impact of last year's trade tariff row.
It expects growth in the US at 2.3 per cent this year, supported by last year's interest rate cuts, with the downwards revision of 0.1 percentage point reflecting the Iran war's effects.
Government data released last week showed early signs of the war's impact on the world's largest economy, the US, where monthly headline inflation climbed to its highest level in nearly four years due to surging petrol costs.
Among forecasts for other major economies, growth in China for 2026 was revised upwards by 0.1 percentage point to 4.4 per cent before it is expected to decelerate to 4 per cent in 2027, as a declining workforce and slowdown in the housing sector bite.
Growth in the eurozone is expected to decline from 1.4 per cent in 2025 to 1.1 per cent this year and 1.2 per cent in 2027, a downwards revision of 0.2 percentage points, due to the Iran conflict.
The war and a slower pace of rate cuts will also affect growth in the UK, now forecast at 0.8 per cent for 2026, a downwards revision of 0.5 percentage points, before recovering at a slower-than-expected pace of 1.3 per cent in 2027.
Meanwhile, the IMF raised its forecast for growth in India by 0.3 percentage points to 6.5 per cent this year, with the Iran war's impact outweighed by a decline in US tariffs on Indian goods from 50 per cent to 10 per cent, as well as a strong carry-over from its economic performance of last year.
Combined advanced economies are forecast to grow by 1.8 per cent in 2026, unchanged from the fund's previous forecast. It lowered its 2026 estimate for emerging markets by 0.3 percentage points to 3.9 per cent.
War risks
Mr Gourinchas said the fund's most recent forecasts represent a “reference scenario”, noting each day that passes without a ceasefire inches the economy closer to what the IMF calls its “adverse scenario”.
Under this scenario global growth would slow to 2.5 per cent this year and inflation would edge up to 5.4 per cent.
Meanwhile, the IMF warned a war extending into next year could drag global growth down to 2 per cent while inflation surges past 6 per cent.
“If we get an increase in food prices that could create food insecurity, that could set some people, especially the most vulnerable, back in ways that might be hard to recover from,” Mr Gourinchas said.
He urged countries to avoid inward-looking policies such as placing export restrictions on refined products.
“The solution here is going to be addressed by finding ways to expand supply, finding ways to expand renewables, finding ways to expand energy security,” he said.
