The International Monetary Fund on Wednesday sharply downgraded its 2026 growth forecast for the Middle East as the Strait of Hormuz's prolonged closure choked off the region's energy supply chains.
Growth in the region is now expected to expand by just 0.7 per cent this year, a decrease of 1.2 percentage points from its April forecast, the IMF said in its latest World Economic Outlook. At the same time, the fund expects the region's growth to rebound to 6.5 per cent in 2027, an increase of 1.9 percentage points from April.
The IMF said the latest forecast reflects a prolonged closure of the Strait of Hormuz, where traffic has partially picked up since a fragile peace deal between the US and Iran took effect last month.
Washington and Tehran have been engaged in indirect talks for a deal that would permanently end the war and reopen the waterway. The current agreement between the two sides includes next month.
Bahrain, Iraq, Kuwait, Qatar and Saudi Arabia have resumed production and exports, while UAE oil exports have clawed back to about 85 per cent of pre-war levels, the International Energy Agency said in a June report.
The IMF said the three producers most affected by the disruptions – Iraq, Kuwait and Qatar – are expected to face sharp contractions this year followed by "double-digit expansions" in 2027.
Forecast growth in Iran was raised by 0.7 percentage point to 5.4 per cent this year owing to some relaxation of export restrictions and a better result for oil exports in March and April.
Saudi Arabia, whose economy is less dependent on Hormuz traffic, is expected to see positive growth at 1.7 per cent, although this also reflects a downgrade of 1.4 percentage points. The kingdom's economy is forecast to pick up to 5.5 per cent in 2027.
The seasonally adjusted Riyad Bank Saudi Arabia purchasing managers' index this week showed that domestic demand helped boost business activity in the kingdom's non-oil private sector, which climbed to its highest level in four months in June.
The UAE, like other member nations in the Gulf Co-operation Council, used alternative routes to bypass Hormuz and fulfil its export commitments to clients. The IMF's latest projections do not include the UAE.
Tehran's grip on the Strait of Hormuz in retaliation for co-ordinated US-Israeli strikes on February 28 sparked fears of a global energy crunch not seen in decades. The International Energy Agency said that, at its peak, 14 million barrels a day were lost due to the closure.
The latest forecasts expect oil prices to average $89 a barrel, 9 per cent higher than in the fund's April projection, with natural gas prices expected to be 5 per cent higher at $15. Brent crude prices have retreated to about $70 to $75 a barrel since the strait's reopening.
"Under the current conditions with the Iranian war, it is hard to predict the price of crude oil with any amount of certainty. My guess is that we will see higher prices for both crude oil and natural gas for several months even with a ceasefire agreement," an industry executive said in the latest Dallas Fed energy survey.
'Modest' global slowdown
The fund, which has warned a prolonged closure of Hormuz would lead to slower growth and higher inflation, only slightly downgraded its 2026 global growth forecast from 3.1 per cent to 3 per cent. The IMF said this "modest slowdown" reflects the Iran war's effects being partly offset by gains related to artificial intelligence. Growth is expected to recover to 3.4 per cent next year.
Global headline inflation is expected to pick up from 4.1 per cent to 4.7 per cent in 2027, slightly higher than previously forecast, indicating the global disinflation process "has stalled", the fund said.
The fund left its growth projection for the US, the world's largest economy, virtually unchanged at 2.3 per cent in 2026 and 2.2 per cent in 2027, while it lowered its 2026 forecast for the euro area from 1.1 per cent to 0.9 per cent.
India's growth is forecast to be among the fastest among emerging market and developing countries at 6.4 and 6.7 per cent in 2026 and 2027 per cent, respectively, the IMF said.
The Washington-based lender said that while the world economy has so far weathered the shock from the war, its impacts are being felt unevenly. Additionally, it said the negative supply shock from the Iran war and the positive technology shock from AI-related advances are having an uneven impact.
"Global economic activity and the outlook are being shaped by two major forces, pushing in opposite directions with asymmetric effects across countries," it said.
