The International Monetary Fund has cut its 2026 growth forecast for the Middle East to 0.7 per cent, a 1.2 percentage point downgrade from April, due to the fall-out from the Strait of Hormuz closure on regional energy exports.
In its World Economic Outlook, published on Tuesday, the fund said it expects growth to rebound to 6.5 per cent in 2027, an increase of 1.9 percentage points from its previous assessment.
The IMF said its forecast reflected the prolonged closure of the strait, which accounts for a fifth of the world's oil supply. Traffic has partially picked up since a fragile peace agreement was signed between the US and Iran last month.
However, the US President Donald Trump said on Wednesday that the agreement was “over” after the American military launched strikes on Iran in response to attacks on ships in the Strait of Hormuz on Tuesday.
“Developments overnight illustrate the uncertainty and risks that surround the outlook,” said Petya Koeva Brooks, deputy head of the IMF's research department.
Bahrain, Iraq, Kuwait, Qatar and Saudi Arabia have resumed production and exports, while UAE oil exports have returned to about 85 per cent of prewar levels, the International Energy Agency said in June.
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” next year.
“The contraction we are projecting for this year, as well as the downward revisions relative to April, reflect longer disruptions in oil, gas and refining production, as well as non-oil activity such as logistics, transport and tourism,” said Denise Egan, head of research at the IMF.
Forecast growth in Iran was raised by 0.7 percentage points to 5.4 per cent this year due to some relaxation of export restrictions and a better result for exports in March and April.
Saudi Arabia, whose economy is less dependent on traffic through the Strait of Hormuz and whose East-West pipeline has offset some of the capacity disruption, is expected to experience growth of 1.7 per cent, although this also reflects a downgrade of 1.4 percentage points. The Saudi economy is forecast to pick up to 5.5 per cent next year.
The seasonally adjusted Riyad Bank Saudi Arabia purchasing managers' index this week showed that domestic demand had helped to boost business activity in the kingdom's non-oil private sector, which climbed in June to its highest level in four months.
The UAE used alternative routes to bypass the Strait of Hormuz and fulfil its export commitments. This includes a 380km pipeline from the Habshan to the port of Fujairah on the Gulf of Oman, where exports have run 74 per cent above their prewar average since the war began.
UAE-linked traffic through the strait fell to 11,300 barrels a day in March before climbing back to 2.1 million barrels a day in June, within 5 per cent of its prewar level. Net exports routed through the Gulf of Oman have kept rising regardless, more than tripling from 303,000 barrels a day in April to 961,000 barrels a day in June.
The IMF's latest projections do not include the UAE.
Tehran's blockade on the Strait of Hormuz, imposed in retaliation after US-Israeli strikes on February 28, sparked fears of an unprecedented global energy crisis. The International Energy Agency said that, at the peak of the conflict, 14 million barrels a day were lost due to the closure of the strait.
The latest forecasts expect oil prices to average $89 a barrel, 9 per cent higher than in the IMF's April projection, with natural gas prices expected to be 5 per cent higher at $15. Brent crude prices retreated to between $70 and $75 a barrel after the strait was reopened, but soared on Wednesday to approach $80 a barrel after Mr Trump's announcement.
“A larger spike in oil prices was avoided thanks to inventory drawdowns, expanded production outside the Gulf and actions to help soften oil demand,” Ms Koeva Brooks said.
In another statement, the heads of the IMF, World Bank and IEA called for a resolution to the conflict and the reopening of the strait.
"Uncertainty remains high and the impacts of the war could linger. Energy markets and transit of goods are still facing strains," they said in a joint statement.
'Modest' global slowdown
The IMF, which has warned that a prolonged closure of Hormuz would lead to slower growth and higher inflation, only slightly downgraded its global growth forecast for this year, from 3.1 per cent to 3 per cent.
The IMF said this “modest slowdown” reflects the effects of the Iran war being partly offset by gains related to AI. Growth is expected to recover to 3.4 per cent next year.
“In effect, we expect a V-shaped recovery,” Ms Koeva Brooks said.
Global headline inflation is expected to pick up from 4.1 per cent to 4.7 per cent next year, slightly higher than previously forecast, indicating that the global disinflation process “has stalled”, the IMF said.
The fund left its growth projection for the US virtually unchanged at 2.3 per cent for this year and 2.2 per cent for next year, while it lowered its forecast for the eurozone from 1.1 per cent to 0.9 per cent for this year.
India's growth is forecast to be among the fastest among emerging markets and developing countries, at 6.4 this year and 6.7 per cent next year, the IMF said.
The fund said that while the world economy has so far weathered the storm during the war, its effects on supply – as well as the positive technology shock from AI-related advances – are being felt unevenly.
