The escalating conflict in the Middle East is threatening to derail the fragile global economic recovery, with the World Bank warning that growth could slow to its weakest level since the COVID-19 pandemic as surging energy prices, rising inflation and higher borrowing costs ripple across economies worldwide.
- Energy Shock Reverberates Through Global Economy
- Developing Economies Face New Headwinds
- Gulf Economies Take Direct Hit
- South Asia Remains Fastest Growing Region
- A Bigger Threat Looms
- Debt Burdens Limit Policy Options
- Commodity Dependence Under Scrutiny
- World Bank Mobilises Up to US$100 Billion
- Recovery at Risk
In its latest Global Economic Prospects report, the World Bank projects global growth will slow to 2.5 percent in 2026, down from 2.9 percent in 2025, as the economic fallout from disruptions in the Gulf region spreads through energy, food and financial markets.
The downgrade affects nearly two-thirds of the world’s economies and marks a significant setback for developing countries already grappling with debt burdens, climate shocks and sluggish investment.
The report paints a sobering picture of an increasingly fragile global economy, warning that developing nations outside China and India are on course to experience nearly a decade without meaningful progress in narrowing income gaps with advanced economies.
Energy Shock Reverberates Through Global Economy
At the centre of the crisis is the disruption of global energy supplies following the closure of the Strait of Hormuz, one of the world’s most important oil shipping routes.
The World Bank estimates that Brent crude oil prices will average US$94 per barrel in 2026, approximately 36 percent higher than 2025 levels, assuming the most severe disruptions ease by July.
The consequences are already being felt far beyond energy markets.
Higher oil prices are expected to push up transportation costs, manufacturing expenses and electricity prices across the world, while a sharp increase in fertilizer prices threatens to drive food inflation higher.
As a result, global inflation is forecast to rise to 4.0 percent this year from 3.3 percent in 2025, reversing progress made by many central banks in bringing prices under control after the pandemic.
“The conflict has taken a toll on global activity,” said Ayhan Kose, Deputy Chief Economist and Director of the World Bank’s Prospects Group.
He noted that the crisis should also serve as a catalyst for governments to strengthen policy frameworks, invest in infrastructure and accelerate reforms that support private sector-led growth.
Developing Economies Face New Headwinds
The outlook is particularly challenging for developing countries.
Growth across developing economies is projected to fall to 3.6 percent in 2026 from 4.4 percent in 2025, marking the slowest pace since the pandemic years.
For Sub-Saharan Africa, the impact is expected to come largely through rising inflation and food prices.
The surge in fertilizer costs is likely to raise agricultural production expenses, placing additional pressure on food security across a region already battling climate-related shocks and persistent poverty.
The slowdown could prove especially difficult for countries that have only recently begun recovering from the economic scars of COVID-19.
Many governments remain burdened by high debt levels and limited fiscal space, reducing their ability to cushion households and businesses from rising living costs.
Gulf Economies Take Direct Hit
While the conflict’s economic impact is global, Gulf economies are expected to bear the most immediate consequences.
The World Bank forecasts growth in Gulf countries directly affected by the conflict will collapse from 3.9 percent in 2025 to near zero in 2026 as trade disruptions, uncertainty and reduced economic activity weigh on performance.
However, the institution expects a relatively strong rebound beginning in 2027, when growth could return to around 5 percent as trade routes normalise and reconstruction efforts gather momentum.
The sharp swing highlights the extent to which regional economies remain vulnerable to geopolitical instability despite years of diversification efforts.
South Asia Remains Fastest Growing Region
Despite the slowdown, South Asia is expected to remain the world’s fastest-growing region.
However, even there growth is forecast to decelerate significantly, falling from 7 percent in 2025 to 6.3 percent in 2026.
The moderation reflects weaker global demand, tighter financial conditions and rising import costs linked to higher energy prices.
The World Bank noted that no region is expected to escape the effects of the current crisis entirely, underscoring the increasingly interconnected nature of the global economy.
A Bigger Threat Looms
The World Bank cautioned that its forecasts are based on an assumption that the most severe supply disruptions will ease in the coming months.
If the conflict intensifies or energy disruptions become more prolonged, the economic consequences could be significantly worse.
Under a more adverse scenario involving deeper energy supply shocks and heightened financial stress, global growth could plunge to just 1.3 percent in 2026 while inflation could accelerate to 4.4 percent.
Such an outcome would bring the global economy dangerously close to recession and place additional pressure on already vulnerable countries.
Debt Burdens Limit Policy Options
One of the report’s most significant warnings concerns the rising debt burden facing developing economies.
Since 2010, aggregate government debt across developing countries has climbed from less than 40 percent of GDP to more than 70 percent.
The World Bank’s analysis shows that countries with high debt levels face rapidly increasing borrowing costs whenever they take on additional debt.
This creates a vicious cycle in which governments find it increasingly difficult to finance critical investments in infrastructure, education, healthcare and social protection.
The report argues that reducing debt burdens can generate substantial economic benefits by creating fiscal space for growth-enhancing investments and improving investor confidence.
Commodity Dependence Under Scrutiny
The report also highlights the vulnerability of commodity-dependent economies, many of which are found in Africa.
Approximately two-thirds of developing economies and nearly 90 percent of low-income countries rely heavily on commodity exports.
While periods of high commodity prices often generate windfall revenues, the World Bank notes that many countries fail to save these gains or use them to strengthen public finances.
Instead, much of the revenue is spent during boom periods, leaving governments exposed when prices fall.
The institution recommends stronger fiscal rules, sovereign wealth funds, improved domestic revenue mobilisation and greater economic diversification as tools for managing future shocks.
World Bank Mobilises Up to US$100 Billion
In response to the growing risks, the World Bank has unveiled a major support package for affected countries.
The institution is making between US$50 billion and US$60 billion immediately available through existing financing instruments, including US$25 billion in pre-arranged funding.
The resources are intended to help governments protect vulnerable populations, strengthen fiscal capacity and provide liquidity support to businesses and farmers facing rising costs.
More than 30 countries are already working with the World Bank to prepare rapid-response measures.
Should the crisis deepen, the institution says it is prepared to scale up assistance to between US$80 billion and US$100 billion over the next 15 months.
Recovery at Risk
World Bank President Ajay Banga said developing countries have spent much of the past decade navigating successive crises, from the pandemic and debt challenges to climate shocks and geopolitical tensions.
“The basic test is the same: protect people and preserve stability today, without giving up on growth and jobs tomorrow,” he said.
The latest forecasts suggest policymakers now face an increasingly difficult balancing act.
For many countries, especially in Africa, the challenge will be containing inflation, protecting vulnerable households and sustaining economic reforms while navigating an increasingly uncertain global environment.
The World Bank’s message is clear: the Middle East conflict is no longer a regional issue. Through energy markets, food supply chains, inflation and financial conditions, it has become a global economic shock capable of reshaping growth prospects far beyond the region’s borders.
