Escalating conflict in the Middle East is set to push global economic growth to its weakest level since the COVID-19 shock, as surging energy prices, rising inflation, and tighter financial conditions weigh heavily on both advanced and developing economies, according to the World Bank Group.
In its latest Global Economic Prospects report, the Bank projects global growth will slow to 2.5 percent in 2026, down from 2.9 percent in 2025, with forecasts downgraded for nearly two-thirds of economies compared to earlier projections in January.
While a modest recovery to 2.8 percent is expected in 2027, growth will still lag 0.4 percentage points below the 2010s average, underscoring a prolonged period of economic fragility.
The report highlights intensifying structural challenges for developing economies, warning that, excluding China and India, many could face nearly a decade without meaningful progress in closing income gaps with advanced nations by 2028.
A key driver of the slowdown is the disruption in global energy markets triggered by the closure of the Strait of Hormuz, a critical oil transit chokepoint. The World Bank forecasts Brent crude to average US$94 per barrel in 2026, representing a 36 percent increase over 2025 levels, assuming disruptions ease midyear.
The energy shock is cascading into broader inflationary pressures. Global inflation is now projected to rise to 4.0 percent in 2026, up from 3.3 percent last year, as higher fuel costs spill into transport, food, and production expenses.
Compounding the challenge is a spike in fertilizer prices, driven by supply constraints, which is expected to push food prices higher globally, hitting vulnerable populations hardest—particularly in low-income and import-dependent economies.
The World Bank cautions that risks remain tilted sharply to the downside. In a more severe scenario—where energy disruptions deepen and financial market stresses intensify—global growth could fall to just 1.3 percent in 2026, while inflation could climb to 4.4 percent.
Such an outcome would significantly strain already fragile fiscal balances and could trigger broader economic instability across emerging markets.
Growth across developing economies is expected to decline to a post-pandemic low of 3.6 percent in 2026, down from 4.4 percent in 2025, before a gradual recovery to 4.2 percent in 2027.
Oil-exporting Gulf economies are projected to bear the brunt of the immediate shock, with growth forecast to plunge from 3.9 percent in 2025 to near zero in 2026.
However, these economies are expected to rebound strongly to around 5 percent growth in 2027–2028, supported by trade normalization and reconstruction activity.
In Sub-Saharan Africa, growth is also slowing, with inflation—particularly food inflation fuelled by fertilizer shortages—emerging as a key pressure point. Meanwhile, South Asia is set to remain the fastest-growing region, though growth will still ease from 7 percent in 2025 to 6.3 percent in 2026.
In response to the unfolding crisis, the World Bank Group has announced it is ready to deploy up to US$100 billion over 15 months to help affected countries stabilize their economies.
In the immediate term, US$50–US$60 billion will be made available through existing financing instruments, including US$25 billion in pre-arranged funds. These resources are expected to support:
- Social protection programmes for vulnerable populations
- Government fiscal capacity
- Liquidity for businesses and agricultural sectors
More than 30 countries are already working with the Bank to strengthen their crisis response frameworks.
Should the situation deteriorate further, the institution says it is prepared to scale up support to US$80–US$100 billion, combining public financing, guarantees, and private-sector mobilization tools.
World Bank President Ajay Banga emphasized the urgency of balancing immediate stabilization with long-term growth priorities.
“The impact differs by country, but the basic test is the same: protect people and preserve stability today, without giving up on growth and jobs tomorrow,” he said.
The report underscores the growing challenge of public debt across developing economies. Since 2010, average government debt levels have risen sharply from below 40 percent to over 70 percent of GDP, limiting fiscal flexibility.
The analysis finds that countries with higher debt burdens face disproportionately rising borrowing costs, creating a vicious cycle that constrains investment in critical sectors such as infrastructure, health, and education.
In addition, many developing economies—particularly commodity exporters—continue to struggle with volatile and poorly diversified revenues. The Bank noted that windfalls from commodity price booms are often spent rather than saved, leaving countries exposed when prices fall.
To strengthen resilience, policymakers are being urged to adopt:
- Fiscal rules to manage spending cycles
- Sovereign wealth funds with stabilization mandates
- Stronger domestic revenue systems
- Economic diversification strategies
Opportunity amid crisis
Despite the bleak outlook, the World Bank sees the current disruption as a catalyst for reforms.
Ayhan Kose, Deputy Chief Economist, noted that crises often present opportunities for structural improvements.
“This moment should be used to strengthen policy frameworks, invest in infrastructure, accelerate business-enabling reforms, and mobilize private capital to support job creation at scale,” he said.
By: Christian Akorlie / businesspostonline
