The World Bank on Tuesday lowered its forecast for the Middle East’s economic performance in 2026, saying the region’s overall gross domestic product would contract by 2.1 per cent this year.

This is the latest downgrade to the World Bank’s regional outlook, amid the continuing war involving Iran and constraints on energy supplies.

Economists had already cut the region’s 2026 growth forecast from 3.6 per cent in January to 2.1 per cent in April.

In June, the World Bank also said global economic growth would slow to 2.5 per cent this year.

The ongoing seven-month war has affected a wide range of economic sectors.

The closure of the Strait of Hormuz at the start of the conflict disrupted a large share of the region’s energy supplies, damaged tourism, aviation and logistics, and increased uncertainty in financial markets.

The assessment was published in the World Bank’s latest economic report on the Middle East, North Africa, Afghanistan and Pakistan.

Roberta Gatti, the World Bank’s chief economist for the region, said: “This conflict is extremely painful, and most of the losses it has caused are concentrated in our region. While the global economy and other regions are upgrading their forecasts, we are having to make significant downward revisions.”

GCC economies forecast to contract 4.3 per cent

The World Bank forecasts that Gulf Cooperation Council economies will contract by an average of 4.3 per cent in 2026, a downgrade of 5.7 percentage points from its April projection.

Lower export volumes resulting from the closure of the Strait of Hormuz were cited as a key reason for the decline, causing substantial losses in output and government revenue.

The World Bank expects economic growth in the UAE and Saudi Arabia, which stood at 4.6 per cent and 6.2 per cent respectively in 2025, to fall to minus 1.6 per cent and minus 2 per cent in 2026.

Qatar is also likely to experience its weakest economic performance in five decades.

Its economic growth is forecast to fall from 1.8 per cent in 2025 to minus 20.9 per cent this year.

According to the report, Qatar’s average monthly gas production fell by about 67 per cent between March and July because of damage to the country’s facilities.

Kuwait’s economy is also expected to contract by 14.6 per cent this year, a downgrade of 8.2 percentage points from the April report.

Sharp decline in regional oil production

The war has had a particularly severe impact on oil-exporting countries.

The closure of the Strait of Hormuz and attacks across the region caused oil production among regional countries to fall from a pre-war average of about 26 million barrels per day to roughly 16 million barrels per day in March.

Data from the International Monetary Fund’s PortWatch platform also showed that only three oil tankers passed through the Strait of Hormuz on the seven-day moving average ending September 27. Gatti said: “For us, the issue is volume and quantity; for the world, the issue is price.”

Oman, which is less dependent on the Strait of Hormuz, is the only GCC country for which the World Bank forecasts positive economic growth this year. Oman’s economy is expected to grow by 3.1 per cent.

Iraq’s economic outlook has also been downgraded by 3.8 percentage points from the April forecast, with its economy expected to contract by about 12.4 per cent in 2026.

Iraq, Opec’s second-largest producer, derives about 90 per cent of its government revenue from oil.

The World Bank also forecasts that Iran’s economy will contract by about 7.7 per cent in 2026.

Growth forecast to rebound in 2027

The World Bank report assumes that the Strait of Hormuz will begin reopening gradually from December 31.

If this scenario materialises, economic activity is expected to rebound sharply in 2027, with growth reaching 8 per cent in the UAE, 6.1 per cent in Saudi Arabia, 25 per cent in Qatar and 20.5 per cent in Kuwait.

Overall economic growth across the GCC is forecast at 8.6 per cent under this scenario.

Under its “Zero Hormuz” strategy, the UAE has sought to diversify its supply chains, while Saudi Arabia has increasingly relied on the East-West pipeline to transport oil to the Red Sea port of Yanbu.

Oil prices have experienced sharp fluctuations since the war began on February 28.

Brent crude, the global oil benchmark, traded at about $118 a barrel in March and May.

Saudi Aramco chief executive Amin Nasser said the East-West pipeline had played an important role in keeping oil prices at around $100 a barrel.

He also warned that replenishing global oil reserves, which have declined following the use of emergency stockpiles, could take up to two years.

Oil-importing countries perform better

By contrast, the World Bank expects oil-importing countries to perform better, a development Gatti described as a “reversal of fortunes” compared with the 2022 energy shock that followed Russia’s invasion of Ukraine.

The World Bank expects Egypt’s economic growth to rise to 5.1 per cent this year, after expanding by 4.4 per cent last year.

Morocco’s growth forecast was raised by 0.2 percentage points to 4.4 per cent, while Pakistan’s was increased by 0.7 percentage points to 3.7 per cent.

Jordan’s growth forecast remained unchanged at 2.7 per cent, while Tunisia’s was lowered by 0.2 percentage points from April to 2.3 per cent.

Economic impact of war intensifies

Gatti said the war involving Iran had placed additional pressure on economies already affected by crises and conflict, weakening prospects for recovery and potentially creating long-term consequences.

Renewed hostilities between Israel and Hezbollah have also reversed Lebanon’s economic recovery.

Lebanon’s economy, which grew by 4.2 per cent in 2025, is expected to contract by 6.4 per cent this year.

Growth forecasts for Afghanistan and Yemen were also lowered to 3 per cent and 1 per cent respectively, while the World Bank expects Syria’s economy to grow by between 8 per cent and 10 per cent this year.

The World Bank also estimates that economic growth in the West Bank and Gaza will decline from 4.3 per cent in 2025 to 1.5 per cent this year, three percentage points below its April forecast.

The poverty rate in these territories is estimated at about 41.9 per cent.

The international institution said Gaza’s economy remained in a state of “near-total collapse” despite the October 2025 ceasefire, with periodic escalations, continuing restrictions and the stalled reconstruction process preventing an economic recovery.

Gatti said: “Fragilities persist, and we are now also seeing a decline in humanitarian assistance. Continued attention to these conditions is essential.”

She said the economic costs of instability had intensified as the war continued, while declining humanitarian assistance had increased the need for sustained attention and investment in affected countries to prevent the crisis from burdening future generations.

Artificial intelligence offers opportunity to boost productivity

The World Bank report also said artificial intelligence remained one of the region’s most significant economic opportunities despite the continuing war.

World Bank economists estimate that the use of AI could increase productivity in about 20 per cent of jobs across the region.

The World Bank has previously urged developing countries to adopt AI as quickly as possible to avoid missing out on its economic benefits.

The institution believes developing economies can avoid repeating some mistakes by using existing tools, adapting them to local conditions and gradually moving towards the development of advanced AI models.

Gatti said: “Some of the prerequisites for benefiting from AI do not necessarily require financial resources, but they do require political will and vision. Appropriate regulations and ethical frameworks are essential for AI to function effectively.”