When the US war with Iran began in late February, the prevailing economic assumption was that oil prices would surge, financial markets would become volatile, and Gulf economies would suffer a temporary shock before quickly recovering. Five months on, those assumptions have proven far too shortsighted.
The initial concern was primarily about there just being an oil price shock, and a short-lived one at that. The greater threat, however, has turned out to be the disruption of the Gulf’s ability to export energy, import goods and operate normally through the Strait of Hormuz. The distinction is important as higher oil prices normally benefit Gulf producers, whereas a prolonged disruption to oil and gas exports harms them.
Bigger shock than oil
The World Bank illustrated the scale of the change in April, cutting its forecast for Gulf growth in 2026 from 4.4 per cent to just 1.3 per cent. By July, the outlook had deteriorated even further. A Reuters survey of economists projected contractions of 8.1 per cent in both Kuwait and Qatar, 5.1 per cent in Bahrain and 0.5 per cent in the UAE, while Saudi Arabia and Oman were expected to remain in positive territory because they possess more diversified export routes.
The irony is that oil prices have not remained at the extreme levels feared at the start of the conflict. Brent was trading at around $84 a barrel on August 10, compared with fears during the early stages of the war that prolonged disruption could push prices towards $120-$150. But this is precisely what has changed the economic calculation.
The problem for the Gulf is no longer simply how high oil prices go, but whether hydrocarbons can be produced, transported and sold. The early economic forecasts assumed that the Strait of Hormuz would reopen relatively quickly. The IMF's July outlook, for example, assumed reopening beginning in mid-July and a return towards normality by March 2027.
That timetable has proved to be far too optimistic. As of last week, negotiations involving Iran and Oman over reopening the strait remain uncertain. Iran is demanding significant concessions from the US, while renewed attacks, including a claimed Houthi strike on a Saudi Aramco refinery, have demonstrated that the conflict still has the capacity to spread beyond the immediate theatre of war.
This has produced a second major change in expectations, with markets increasingly pricing duration and uncertainty, rather than simply the probability of a short war. This matters because the economic consequences accumulate over time. Shipping costs, insurance premiums, supply chain disruptions, postponed investment and weaker consumer confidence can become more damaging than the initial oil price spike.
Markets pricing duration
Another major lesson of the past five months is how differently the Gulf economies have been affected. Qatar and Kuwait are particularly exposed because of their much greater dependence on energy exports through Hormuz. Saudi Arabia, on the other hand, has been better protected by its East-West pipeline infrastructure, while Oman has ports outside the strait. The UAE also has alternative export infrastructure, although its position as a global logistics, aviation, tourism and financial hub does to some extent make it vulnerable to wider regional disruption.
Yet the UAE has demonstrated considerable resilience. The IMF cut its 2026 UAE growth forecast to 3.1 per cent in April, while expecting a strong rebound to 5.3 per cent in 2027. More recently, UAE non-oil private-sector activity accelerated in July, with new orders and exports strengthening. The UAE's diversification strategy may not have eliminated its exposure to a regional crisis, but it has reduced the dependence of economic growth on oil production.
Varying economic realities
The emerging consensus is therefore considerably less pessimistic about the medium-term GCC outlook than it was during the darkest months of the conflict, but more cautious about the near term. The IMF's July forecasts point towards a sharp rebound in 2027 for economies whose energy exports and transport networks recover. Saudi Arabia, for example, is projected to move from 1.7 per cent growth in 2026 to 5.5 per cent in 2027.
This suggests that much of the economic damage is viewed as a disruption to the timing of growth rather than a permanent destruction of it. But that conclusion depends on a critical assumption that normalisation can still be achieved in the near-term to medium-term.
If Hormuz reopens and regional security improves, the Gulf could indeed experience a powerful rebound as delayed investment, energy production, tourism, trade and infrastructure activity resume. If disruption persists, however, the story could change from a V-shaped recovery to a much more prolonged and less satisfactory U-shaped one.
There is one lasting consequence of the war that is already clear. The Gulf will emerge more conscious of the economic risks associated with geographical concentration in energy exports, shipping routes, food supplies and critical infrastructure. Investment in alternative logistics corridors, storage, domestic production, energy security and supply-chain resilience is likely to accelerate.
Five months ago, the economic debate was largely about the price of oil, whereas today it is much more about the price of geopolitical dependence, which may ultimately prove to be the most important and lasting economic legacy of the war for this region.
