The World Bank has sharply downgraded its 2026 growth outlook for Middle East economies, citing escalating geopolitical instability linked to the conflict involving the United States, Israel, and Iran. The revised projections, published in its latest regional economic update, highlight mounting risks to macroeconomic stability and regional development.
Conflict Disruptions Reshape Economic Outlook
The downgrade follows weeks of heightened tensions, which have disrupted trade flows and energy markets across the region. Although Donald Trump announced a two-week ceasefire, conditional on Iran easing its blockade of the Strait of Hormuz, uncertainty remains high. Iran’s foreign minister indicated a willingness to halt counter-attacks and allow safe passage, yet the situation continues to evolve.
The World Bank emphasized that the temporary closure of the strait, alongside damage to energy and public infrastructure, has triggered financial volatility. Consequently, markets have experienced increased instability, while investor confidence has weakened. These disruptions have directly contributed to the downward revision of growth forecasts.
“Risks are firmly tilted to the downside. Uncertainty is pervasive, and the economic outlook could shift significantly if the conflict intensifies or protracts,” the report said.
Gulf Economies Face Sharpest Slowdown
Regional GDP growth, excluding Iran, is now expected to decline from an estimated 4% in 2025 to 1.8% in 2026. This marks a 2.4 percentage point drop from earlier projections, underscoring the scale of the economic impact. Moreover, oil- and gas-dependent economies are among the hardest hit.
The Gulf Cooperation Council, which includes Saudi Arabia, is projected to see growth fall to 1.3% in 2026. This represents a significant downgrade of 3.1 percentage points from January estimates, largely due to reduced hydrocarbon revenues. As energy exports face disruption, fiscal balances and public spending capacity are also under pressure.
Within the bloc, less diversified economies are experiencing even steeper declines. Kuwait and Qatar are projected to contract by 6.4% and 5.7%, respectively. Therefore, reliance on energy exports continues to amplify vulnerability to geopolitical shocks.
Structural Challenges and Long-Term Risks
Beyond immediate disruptions, the report highlights deeper structural challenges facing the region. According to Ousmane Dione, the crisis underscores the urgency of economic transformation.
“The current crisis is a stark reminder of the work ahead for the region: not only to weather shocks, but to rebuild more resilient economies with stronger macroeconomic fundamentals, innovate and improve governance, invest in infrastructure, and boost employment-creating sectors,” Ousmane Dione, the World Bank’s vice president for the region said in a statement.
At the same time, the outlook for Iran remains highly uncertain. Due to “exceptionally high uncertainty”, the World Bank said it was not publishing forecasts beyond the 2025/26 fiscal year for Iran. It said real GDP was estimated to contract by 2.7% in the 2025/26 fiscal year to March 20, 2026.
Overall, the report signals that while short-term stabilization may be possible, long-term recovery will depend on structural reform and diversification. Consequently, the region faces a critical juncture as it navigates both geopolitical tensions and economic transformation.
