By Paul Hannon
The global economy could grow this year at less than half its 2025 pace if the conflict in the Middle East leads to a lengthy reduction in energy supplies and a sharp fall in equity prices, the World Bank said Thursday.
The conflict is now in its fourth month, with little sign of a lasting peace. The U.S. began a fresh wave of attacks on Iran on Wednesday, launching strikes against several targets on President Trump's orders.
In a twice-yearly report on the global outlook, the World Bank said it expects economic growth to slow to 2.5% this year from 2.9% last year, assuming that shipments of oil, natural gas and other raw materials through the Strait of Hormuz begin to return to normal from August.
That's a small downgrade from the 2.6% growth seen in January, but excluding the pandemic contraction and a 2009 decline in output during the global financial crisis, that would mark the weakest year since 1991. However, the World Bank warned that a more prolonged conflict would lead to a sharper slowdown.
"A renewed escalation of hostilities or more prolonged disruptions to commodity flows could further raise commodity prices, intensify inflationary pressures and food insecurity, trigger financial stress, and lower growth," said Indermit Gill, the World Bank's chief economist.
Should the disruption to shipping end soon, the World Bank expects the U.S. economy to grow by 2.2% this year, unchanged from its January forecasts. But it said roughly two-thirds of the world's economies would face slower growth as a result of the conflict, with developing countries experiencing the most significant setbacks, while the poorest households would suffer most.
"War anywhere is bad for poor people everywhere," Gill said.
In the immediate vicinity of the conflict, the bank expects to see economic contractions in Iraq, Kuwait and Qatar of 8.9%, 6.4% and 5.7% respectively. It said it was unable to produce forecasts for Iran, Lebanon or Syria due to high levels of uncertainty.
The bank's economists forecast that commodity prices will rise by 22% this year, having expected to see a 7% decline in January. Much of that increase is due to oil, with the price per barrel now expected to average $94 in 2026, or $34 more than the January forecast.
But the price rises go beyond energy. The bank now expects prices of industrial metals to be 18% higher than in 2025, while fertilizer prices are forecast to rise by 38%. For this year, the bank expects increases in food prices to be relatively modest at 3%, thanks to plentiful grain harvests.
Should the Strait not reopen until the final quarter of this year, the World Bank expects economic growth to be just 2.1%, with oil prices averaging $115 a barrel this year and remaining high well into next year.
But the hit to growth would be even more severe if an extended blockage helped trigger a sharp fall in equity prices or a sharp rise in bond yields. That combination could see global output grow by just 1.3%. Excluding the Covid-19 pandemic contraction and a similar decline in output during the 2008-09 financial crisis, that would mark the weakest year since 1991. Developing economies would see growth of just 2.4%.
The latest setback to world growth has reinforced the World Bank's expectation that the 2020s will see little progress for developing economies in their efforts to catch up with the living standards of rich nations.
"Barring a miracle, the 2020s will prove to be what their ominous opening foreshadowed: a lost decade-not just for a couple of outliers, but for dozens of developing economies," Gill said.
The 2030s could see an improvement as new technologies linked to artificial intelligence are deployed, ranging from a modest boost to growth if they lifted annual productivity growth to 1.4% from 0.8%, to the fastest expansion since the 1970s if they proved "transformative" and raised productivity growth to 2.7% annually.
However, developing economies may not be best placed to benefit from the new technologies.
"AI's leading models suffer from a major blind spot: the languages of roughly half the world's people remain poorly represented in the data that trains the models," said Gill. "Unless such gaps are closed, the AI revolution could widen rather than narrow the gap between rich and poor countries."
Assuming the Strait reopens soon, the World Bank expects global economic growth to pick up to 2.8% in both 2027 and 2028. However, the bank's economists warned that in a more fractious and less pacific world, fresh conflicts that weaken economic growth are possible.
"The potential for further geopolitical ruptures in the next few years cannot be discounted, raising the possibility of further disruptive supply shocks," they wrote.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
06-11-26 0944ET
