World Bank Slashes Global Growth Forecast Amid Middle East Conflict

A Deeper Dive into the World Bank's Latest Global Economic Projections

Global Growth Forecast Trimmed Amid Geopolitical Headwinds

In its latest semi-annual release of the 'Global Economic Prospects' report, the World Bank has delivered a sobering assessment of the global economic landscape. The institution has lowered its forecast for global economic growth in 2026 to 2.5%. This downward revision is significantly influenced by the escalating conflict in the Middle East, a development that casts a shadow over the prospects for robust economic expansion. This revised figure represents the lowest projected growth rate since the onset of the COVID-19 pandemic, underscoring the fragilities inherent in the current global economic system when confronted with geopolitical instability.

The data indicates that global economic growth is expected to reach 2.9% in 2025, a modest upward adjustment of 0.2 percentage points from the January forecast. However, the 2026 projection of 2.5% marks a downward revision of 0.1 percentage points from the earlier estimate. The repercussions of these geopolitical tensions are far-reaching, with the growth prospects for approximately two-thirds of the world's countries being downgraded. Nations heavily reliant on energy exports, such as the United Arab Emirates and Iraq, are among those experiencing the most substantial reductions in their economic outlook.

Conflict Spillover and Escalating Risks

The conflict, which originated from military strikes by the US and Israel against Iran on February 28th, has now entered its fourth month. The disruption to shipping lanes in the Strait of Hormuz has predictably led to a surge in international oil prices, reintroducing inflationary pressures into the global economy. Consequently, the likelihood of central banks worldwide tightening their monetary policies is on the rise. Concurrently, a significant increase in fertilizer prices has emerged, signaling a growing potential for a global food supply crisis.

Each escalation in geopolitical tensions has a direct impact on commodity markets. Following a period of ceasefire in April, the Middle East has once again witnessed large-scale exchanges of fire. Adding to the uncertainty, the US President has issued strong warnings of intensified strikes against Iran if a peace agreement is not reached. Stimulated by these multiple news events, international oil prices saw a substantial jump of $2 per barrel by the close of trading on Wednesday.

Forecasting Models and Potential Scenarios

The World Bank has developed three distinct forecast models to account for varying market conditions. Under the baseline scenario, the average price of Brent crude oil is projected to reach $94 per barrel this year, a 36% increase from 2025. Disruptions to energy supply are anticipated to largely conclude by the end of July, with global inflation expected to remain at 4%.

Should energy supply disruptions persist for an extended period, the average price of Brent crude oil could soar to $115 per barrel for the entire year. This would push global inflation up to 4.4%, and consequently, global economic growth would decelerate to 2.1%. The most pessimistic scenario envisions the energy crisis spilling over into financial markets, leading to heightened volatility and a sharp decline in investor confidence. In such a case, global economic growth could plummet to as low as 1.3%.

Ayhan Kose, Deputy Chief Economist at the World Bank, emphasized that the confluence of pressures in the energy sector and risks in financial markets could rapidly deteriorate the global economic outlook and lead to a swift erosion of market confidence.

Long-Term Challenges and Economic Outlook

Looking further ahead, global economic growth is projected to recover to 2.8% between 2027 and 2028. However, this rate remains 0.4 percentage points below the average annual growth experienced in the 2010s. A combination of factors is collectively suppressing the momentum for long-term global economic recovery. These include slowing population growth, subdued private and public investment, elevated government debt levels, and sluggish international trade growth.

Indermit Gill, Chief Economist at the World Bank, bluntly stated that the global economy's resilience today is weaker not only than in 2008 but also weaker than in 2018. Over the coming years, global markets are expected to continue facing a triple threat of policy uncertainty, high inflation, and elevated interest rates.

Divergent Growth Performance Across Economies

In the current shock, developing economies are experiencing a particularly pronounced impact. The World Bank forecasts that developing economies will see an overall growth rate of 3.6% in 2026, a significant decline from the 4.4% projected for 2025, marking a post-pandemic low. With the exception of China and India, most developing countries are struggling to narrow the per capita income gap with developed economies. Their economic catch-up process is either stagnating or faces the prospect of a "lost decade."

The growth performance of major economies exhibits clear divergence. The US economy is projected to maintain a growth rate of 2.2% in 2026, followed by a slight retreat to 2.1% in 2027 and a further dip to 2.0% in 2028. For the Eurozone, growth is expected to be 0.8% in 2026, a marked slowdown from the 1.4% predicted for 2025. Japan's economic growth is forecast at 0.7% in 2026, down from 1.1% in 2025.

India continues to be the fastest-growing large economy globally, with projected growth of 7.0% in 2025 and an anticipated 6.6% in 2026. Mr. Gill believes that India is highly likely to sustain high growth rates over the next two decades.

Regions Facing Significant Headwinds

The Middle East, North Africa, Afghanistan, and Pakistan region stands out as a particularly hard-hit area in this economic downturn. The region's economic growth is projected at 4% for 2025. However, the World Bank has significantly downgraded its 2026 growth forecast for this region by 2.7 percentage points to 1.6%. Nevertheless, the report anticipates a rebound in the region's economy to 5% in 2027.

Looking at individual countries, the UAE's economic growth is expected to be 6.2% in 2025. The institution's January forecast had predicted growth of 5% for 2026, a figure that has now been substantially reduced to 2.4%. Turkey's growth forecast for 2026 has been lowered by 0.9 percentage points to 2.8%. Similarly, Middle Eastern countries reliant on oil exports, such as Iraq, have also seen their growth projections sharply revised downwards.