US-Israel war in Iran may cut global growth to 2.5% in 2026

Global economic growth is expected to slow to 2.5 per cent in 2026, its lowest level since the COVID-19 pandemic, as the ongoing war in West Asia drives up energy prices, inflation and borrowing costs, according to the World Bank Group's latest Global Economic Prospects report. In response, the institution said it is prepared to provide up to $100 billion in financing, guarantees and private sector support over the next 15 months if economic conditions worsen.

The report forecasts global growth to fall from 2.9 per cent in 2025 to 2.5 per cent in 2026, with outlooks for two-thirds of economies downgraded since January. Growth is projected to recover modestly to 2.8 per cent in 2027 but remain below the average pace recorded during the 2010s.

For developing economies, the slowdown threatens to prolong a period of weak income convergence. By 2028, developing countries excluding China and India are expected to have experienced nearly a decade without progress in narrowing per capita income gaps with advanced economies.

"Developing countries have faced a series of challenges over the last decade," said Ajay Banga, President of the World Bank Group. "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."

A key driver of the weaker outlook is the disruption to global energy markets following the closure of the Strait of Hormuz. Brent crude oil prices are projected to average $94 a barrel in 2026, about 36 per cent higher than 2025 levels, assuming major supply disruptions ease by July.

Higher energy costs are also expected to push fertiliser prices sharply higher, feeding into food inflation. Global inflation is forecast to rise to 4 per cent in 2026 from 3.3 per cent in 2025.

The World Bank warned that risks remain substantial. Under a scenario involving more severe energy disruptions and significant financial stress, global growth could drop to just 1.3 per cent in 2026, while inflation could rise to 4.4 per cent.

Growth in developing economies is projected to slow to a post-pandemic low of 3.6 per cent in 2026 from 4.4 per cent in 2025 before recovering to 4.2 per cent in 2027.

West Asia economies most directly affected by the conflict are expected to face the steepest downturn. Growth in Gulf economies is forecast to fall from 3.9 per cent in 2025 to near zero in 2026 before rebounding to around 5 per cent in 2027 and 2028 as trade recovers and reconstruction spending begins.

South Asia is expected to remain the world's fastest-growing region, although growth is projected to slow from 7.0 per cent in 2025 to 6.3 per cent in 2026 before recovering to 6.9 per cent in 2027. Sub-Saharan Africa is also expected to face mounting inflationary pressures linked to fertiliser shortages and rising food prices.

To help countries manage the crisis, the World Bank Group said it is immediately making available $50 billion to $60 billion through existing instruments, including $25 billion in pre-arranged financing. More than 30 countries are already working with the institution to strengthen preparedness and ensure rapid deployment of support measures.

"The conflict has taken a toll on global activity, but every crisis also brings an opportunity," said Ayhan Kose, Deputy Chief Economist and Director of the Prospects Group at the World Bank Group. "This moment should be used to strengthen policy frameworks, invest in infrastructure, accelerate business-enabling reforms, and mobilise private capital to support job creation at scale."

The report also identified long-term fiscal vulnerabilities facing developing economies. Nearly two-thirds of developing countries and almost 90 per cent of low-income countries are commodity exporters, leaving them highly exposed to volatile commodity prices. The World Bank recommends stronger fiscal rules, sovereign wealth funds, improved domestic revenue mobilisation and greater economic diversification to manage these risks.

Another major concern is rising public debt. Aggregate government debt across developing economies has increased from less than 40 per cent of gross domestic product in 2010 to more than 70 per cent today. According to the report, high debt levels are raising borrowing costs and reducing governments' ability to invest in infrastructure, healthcare and education.

Regionally, growth in East Asia and the Pacific is projected at 4.2 per cent in 2026 and 4.4 per cent in 2027. Europe and Central Asia are expected to grow by 2.1 per cent and 2.3 per cent, respectively, while Latin America and the Caribbean are forecast to expand by 2.2 per cent and 2.5 per cent.

Growth across the Middle East, North Africa, Afghanistan and Pakistan region is projected to fall to 1.6 per cent in 2026 before rebounding to 5 per cent in 2027. Sub-Saharan Africa is expected to record growth of 4 per cent in 2026 and 4.4 per cent in 2027.