The global economy is this year set to expand at its lowest rate since the Covid-19 pandemic, with nearly zero growth forecast for Gulf nations as a result of the Iran war, the latest World Bank report has found.
Global growth is forecast to slow to 2.5 per cent in 2026 from 2.9 per cent the previous year, with economic projections for two thirds of economies downgraded from January's forecast. Growth is expected to rebound to 2.8 per cent next year but will remain 0.4 percentage points below the average rate of the 2010s.
Gulf economies directly affected by the conflict are expected to take the biggest hit, with growth at close to zero this year, after 3.9 per cent in 2025, the Global Economic Prospects report said. Economies will rebound to about 5 per cent in 2027–28 after trade flows recover and reconstruction is kick-started.
The Iran war “will weigh heavy on growth and we are projecting a slowdown in the global economy in 2026 compared to 2025" Anna Bjerde, World Bank managing director for operations, told The National in an interview. "We are hoping for a rebound in 2027 but it all depends on the duration and intensity of the conflict."
She added that the Middle East as a whole is taking a “pretty big hit from this conflict in particular. The Gulf countries are taking a larger share of that hit because they are directly impacted by the conflict, and the disruption to oil and gas exports is the most prominent challenge in the region".
Gulf economies have also been affected by a reduction in tourism and flights, trade and logistics as the closure of the Strait of Hormuz disrupts commercial activity and drives up energy prices and inflation higher.
“The third aspect we worry about is there are so many people in the Gulf who work here and send remittances back home, and we worry about the reduction in those remittances because they are often a source of income for families in other countries, so that also becomes a weight.”
However, Ms Bjerde highlighted a strong resilience across the Gulf due to the economic diversification that will help nations withstand any shock.
“Sound macro-fundamentals are another strength in many countries here,” she said. “Because the fiscal performance has been strong, the reserves are in place to be able to act as buffers when situations like this happen.”
Developing economies are also expected to record slower growth this year at 3.6 per cent, down from 4.4 per cent in 2025, before recovering to 4.2 per cent in 2027.
South Asia, however, is expected to record the strongest growth of any region in 2026 at 6.3 per cent, down slightly from 7 per cent in 2025.
The Middle East conflict has disrupted global energy flows and spurred a rally in oil prices that is stoking fears of a surge in global inflation.
The war which began on February 28, with Israel and the US bombing Iran, and Tehran lashing out at its Arab neighbours in retaliation, has disrupted business across the region, with an adverse impact on tourism and aviation.
The Strait of Hormuz has remained virtually shut as the US and Iran struggle to agree on a peace deal, with both sides enforcing a de facto blockade on the waterway that usually serves a fifth of global crude oil and liquefied natural gas supply.
Inflation surge
The World Bank also predicted global inflation to rise to 4 per cent this year from 3.3 per cent in 2025, as energy and fertiliser prices increase while the strait remains closed.
The Gulf is a vital supplier of urea and other ingredients in fertiliser production, such as nitrogen and sulphur. More than 30 per cent of global fertilisers, which are essential for crop growth, usually transit through the strait.
Brent crude prices are forecast to average $94 a barrel this year, up 36 per cent compared with 2025 levels in a scenario where the worst disruption abates in July, the report said.
“If energy supply disruptions prove more severe than currently assumed and are accompanied by substantial financial stress, global growth could fall to just 1.3 per cent in 2026 and inflation would rise to 4.4 per cent,” it said.
Oil prices have been volatile since the onset of the war, with prices soaring to about $120 per barrel in March before falling after Iran and the US agreed to a fragile ceasefire with hopes for a permanent deal.
But hundreds of ships remained stranded in the Gulf, even as movement of vessels across the strait has improved slightly in the past few weeks. Renewed fighting between the US and Iran is raising fresh concerns about the safe movement of shipping in the area.
Package of $100bn
In response to the Middle East crisis, the World Bank is planning to provide up to $100 billion to affected countries in the next 15 months, with $50 billion-$60 billion of financing available immediately.
The measure aims to provide support for the world's most vulnerable populations, boost fiscal capacity, and provide working capital and liquidity to firms and farms.
“We are providing liquidity where it is needed now - and we are ready with additional financing, guarantees and private-sector solutions if pressures deepen,” said Ajay Banga, president of the World Bank Group. “Our job is to help countries steady the ship, keep reforms moving and emerge stronger on the other side.”
Rising debt levels
The World Bank also highlighted how rising debt levels are making it harder for countries to respond to crises and invest in long-term development priorities, which in turn is driving up borrowing costs.
Since 2010, total government debt in developing economies has climbed from less than 40 per cent of gross domestic product to exceed 70 per cent. The analysis found that the more indebted a country is, the more sharply its borrowing costs rise with additional debt accrued.
“For countries with elevated debt-to-GDP ratios, reducing debt levels can yield meaningful financial rewards – greater fiscal space to invest in infrastructure, health and education, fuelling economic growth and job creation,” the lender said.
