World Bank cuts 2026 outlook as Middle East war fuels energy shock

The World Bank cut its forecast for global growth in 2026 to 2.5% on Thursday (June 11), blaming the war in the Middle East and warning that the outlook could deteriorate sharply if energy supplies suffer deeper disruption and financial markets come under heavy strain.

In its half-yearly Global Economic Prospects report, the bank said the world economy expanded by 2.9% in 2025, 0.2 percentage point higher than it had estimated in January.

Its latest 2026 projection, however, was trimmed by 0.1 percentage point from January and marks the weakest forecast since the Covid pandemic began in late 2019.

The war has forced the World Bank to downgrade forecasts for two-thirds of countries.

The largest cuts were made for the United Arab Emirates, Iraq and other Middle Eastern economies whose energy exports have been badly affected by the conflict.

The report comes as the war, launched by US and Israeli strikes on Iran on February 28, enters its fourth month.

The closure of the Strait of Hormuz has pushed energy prices sharply higher, revived global inflation pressure and strengthened expectations that many countries will keep monetary policy tighter.

Fertiliser prices have also surged, raising fears of a serious food supply crisis.

Oil prices ended nearly US$2 higher on Wednesday after US President Donald Trump said the US would attack Iran “very hard” unless a peace deal was finalised.

His comments followed one of the biggest exchanges of fire since an April ceasefire.

Under its baseline forecast, the World Bank assumes Brent crude will average US$94 a barrel this year, 36% above its 2025 level.

It also expects the worst energy supply disruption to ease by the end of July, while global headline inflation is projected at 4%.

The bank said global growth could slow further to 2.1% if energy disruption lasts longer and oil averages US$115 a barrel this year, a scenario that could lift inflation to 4.4%.

In a more severe case, growth could fall to just 1.3% if the energy shock spills into financial markets, leading to lower energy prices, greater volatility and weaker confidence.

“These risk scenarios show how quickly the outlook could weaken if energy and financial pressure reinforce each other,” said Ayhan Kose, the World Bank’s deputy chief economist.

He added that confidence could weaken rapidly if the energy shock triggered a financial market shock.

Growth is expected to improve to 2.8% in both 2027 and 2028, but that would still be 0.4 percentage points below the average pace seen during the 2010s.

World Bank chief economist Indermit Gill said the slowdown reflected several forces, including weaker population growth, slower private investment, falling public investment, rising public debt and slower trade growth.

“The world economy is a lot less resilient today than it was in 2008 and even as compared with 2018,” Gill told reporters, adding that the coming years were likely to be shaped by high policy uncertainty, inflation pressure and elevated interest rates.

The report said weak growth in developing economies had stalled progress towards advanced-economy income levels.

It warned that dozens of developing countries, excluding China and India, faced a “lost decade” in which they made no progress in narrowing the per capita income gap with richer economies.

Developing economies have been hit harder by the war, with the World Bank now expecting their growth to fall to a post-pandemic low of 3.6% this year, down from 4.4% in 2025.

For the United States, the bank kept its 2026 growth forecast unchanged at 2.2%, but said expansion could ease to 2.1% in 2027 and 2% in 2028.

The euro area is expected to grow by 0.8% in 2026, down from 1.4% in 2025, while Japan’s GDP growth is forecast to slow to 0.7% from 1.1%.

China’s economy is now expected to expand by 4.2% in 2026, a downward revision of 0.2 percentage points, after growth of 5% in 2025.

The sharpest regional blow is expected in the Middle East, North Africa, Afghanistan and Pakistan, where the World Bank cut its 2026 growth forecast by 2.7 percentage points to 1.6%, compared with 4% in 2025.

It said growth in the region could recover to 5% in 2027.

The United Arab Emirates is now forecast to grow by 2.4% in 2026, far below the January estimate of 5% and the 6.2% rate recorded in 2025.

The bank also lowered Turkey’s 2026 growth forecast by 0.9 percentage points to 2.8%.

India remains the world’s fastest-growing large economy, with GDP expected to rise by 6.6% in 2026 after growth of 7% in 2025.

Gill said India’s growth rates were likely to stay relatively high over the next two decades.

Reuters