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The crisis in the Middle East has delivered yet another shock to the global economy, slowing growth, reigniting inflationary pressures and heightening uncertainty, according to the World Economic Situation and Prospects as of mid-2026 report.
Global GDP growth is now forecast at 2.5 per cent in 2026—0.2 percentage points below the January projection and well below pre-pandemic norms. A modest recovery is projected at 2.8 per cent in 2027. Solid labour markets, resilient consumer demand, and AI-driven trade and investment in select economies are expected to provide some support, but the downgrade underscores a further weakening of an already subdued global outlook.
The shock is primarily felt in the energy sector—through constrained supply, surging prices, and rising freight and insurance costs—with effects cascading through supply chains and increasing production costs globally. While the surge in prices delivers substantial windfall gains for energy companies, it has intensified cost pressures for households and businesses worldwide. The overall impact will depend on the duration of disruptions in energy markets, leaving the outlook highly uncertain and risks tilted to the downside.
The conflict has halted the global disinflation trend underway since 2023. In developed economies, inflation is forecast to rise from 2.6 per cent in 2025 to 2.9 per cent in 2026, edging further above central bank targets in most cases. In developing economies, the uptick is sharper: inflation is projected to accelerate from 4.2 per cent to 5.2 per cent, as higher energy, transport and import costs erode real incomes and broaden price pressures across a wide range of goods.
A particular concern is food prices. Fertilizer supplies have been disrupted, pushing up costs, which could reduce crop yields, exerting an upward pressure on food prices.
For central banks, the increasingly uncertain inflation environment poses a dilemma: raising interest rates to contain inflation risks further weakening growth, while standing pat risks allowing price pressures to become entrenched.
Global financial markets have so far remained resilient, absorbing the initial shock in broadly orderly fashion. However, higher energy prices have lifted inflation expectations, driving short‑term bond yields higher. For developing countries, this has tightened external financing conditions and weakened fiscal positions, particularly where policy space is already limited.
“The Middle East crisis has intensified strains across developing economies,” said Li Junhua, United Nations Under‑Secretary‑General for Economic and Social Affairs. “Rising borrowing costs and renewed capital‑flow pressures risk deepening debt vulnerabilities and constraining the resources available for sustainable development at a critical moment.”
Broad-based slowdown with uneven regional impacts
The impact of the crisis is highly uneven, with the most severe damage concentrated in Western Asia. Growth in the region is projected to plunge from 3.6 per cent in 2025 to 1.4 per cent in 2026, driven not only by the energy shock but also by direct infrastructure damage and severe disruptions to oil production, trade, and tourism.
Elsewhere, outcomes vary widely, shaped above all by exposure and the capacity to respond. The United States is expected to remain comparatively resilient, with growth projected at 2.0 per cent in 2026, broadly stable from 2025, supported by solid household demand and continued investment in advanced technologies such as artificial intelligence. Europe, by contrast, is more exposed, with heavy reliance on imported energy straining households and businesses. Growth in the European Union is projected to slow from 1.5 per cent in 2025 to 1.1 per cent in 2026, while the United Kingdom faces a steeper moderation, from 1.4 per cent to 0.7 per cent.
In Asia, China’s diversified energy mix, sizable strategic reserves, and proactive policy support are providing an important buffer, with growth projected to moderate from 5.0 per cent in 2025 to 4.6 per cent in 2026. India remains one of the fastest‑growing major economies, with output still expected to expand by 6.4 per cent, though the step‑down from 7.5 per cent in 2025 underscores the drag from higher energy import costs and tighter financial conditions.
In Africa, average growth is projected to ease only slightly—from 4.2 per cent in 2025 to 3.9 per cent in 2026—but this masks a deepening divide: oil and gas exporters are benefiting from elevated prices, while net energy importers face rising fiscal pressures from higher fuel and food costs. In Latin America and the Caribbean, most economies are relatively less exposed, yet the region remains on a low‑growth trajectory. Growth is forecast to slow from 2.5 per cent in 2025 to 2.3 per cent in 2026, constrained by weak investment and limited policy space.
Middle East crisis threatens development gains
The downgraded global outlook understates the true scale of the setback. The conflict in the Middle East threatens to reverse hard-won development gains and further slow progress toward the Sustainable Development Goals. Resulting price shocks are eroding food security, real incomes, and productive investment—heightening the risk of lasting social and economic scarring.
Low-income families bear the heaviest burden, as higher food and energy prices take up a larger share of their spending and rising costs outpace wages, increasing poverty. Yet the governments most in need of shielding vulnerable populations are the least equipped to do so: aid flows are declining sharply, rising debt-service costs are crowding out spending on health, education, and social protection, and fiscal space to respond is severely constrained.
On the environmental front, persistently high energy prices risk a short-term return to carbon-intensive fuels, even as they strengthen the longer-term case for accelerating the shift away from fossil-fuel dependence. Addressing these intersecting threats requires sustained multilateral action, including keeping trade open, expanding concessional finance, and supporting structural transformation. The Sevilla Commitment, the outcome of the Fourth International Conference on Financing for Development, provides a critical framework to scale up finance, address debt challenges and support the most vulnerable countries.
Renewed headwinds to productivity growth
Beyond these impacts of the Middle East conflict, the report draws attention to weakening foundations for medium-term growth. Global productivity growth has slowed since the global financial crisis, and current disruptions risk reinforcing this trend by dampening investment and trade flows. Across regions, widening gaps in capital accumulation, skills and innovation are contributing to increasingly uneven performance. Geopolitical fragmentation and constrained fiscal space risk further eroding productivity growth, entrenching existing divergences. Amid these headwinds, artificial intelligence offers significant potential but also poses considerable risks, with gains likely to be concentrated in a limited number of countries.
The crisis in the Middle East has delivered yet another shock to the global economy, slowing growth, reigniting inflationary pressures and heightening uncertainty, according to the World Economic Situation and Prospects as of mid-2026 report.
Global GDP growth is now forecast at 2.5 per cent in 2026—0.2 percentage points below the January projection and well below pre-pandemic norms. A modest recovery is projected at 2.8 per cent in 2027. Solid labour markets, resilient consumer demand, and AI-driven trade and investment in select economies are expected to provide some support, but the downgrade underscores a further weakening of an already subdued global outlook.
The shock is primarily felt in the energy sector—through constrained supply, surging prices, and rising freight and insurance costs—with effects cascading through supply chains and increasing production costs globally. While the surge in prices delivers substantial windfall gains for energy companies, it has intensified cost pressures for households and businesses worldwide. The overall impact will depend on the duration of disruptions in energy markets, leaving the outlook highly uncertain and risks tilted to the downside.
The conflict has halted the global disinflation trend underway since 2023. In developed economies, inflation is forecast to rise from 2.6 per cent in 2025 to 2.9 per cent in 2026, edging further above central bank targets in most cases. In developing economies, the uptick is sharper: inflation is projected to accelerate from 4.2 per cent to 5.2 per cent, as higher energy, transport and import costs erode real incomes and broaden price pressures across a wide range of goods.
A particular concern is food prices. Fertilizer supplies have been disrupted, pushing up costs, which could reduce crop yields, exerting an upward pressure on food prices.
For central banks, the increasingly uncertain inflation environment poses a dilemma: raising interest rates to contain inflation risks further weakening growth, while standing pat risks allowing price pressures to become entrenched.
Global financial markets have so far remained resilient, absorbing the initial shock in broadly orderly fashion. However, higher energy prices have lifted inflation expectations, driving short‑term bond yields higher. For developing countries, this has tightened external financing conditions and weakened fiscal positions, particularly where policy space is already limited.
“The Middle East crisis has intensified strains across developing economies,” said Li Junhua, United Nations Under‑Secretary‑General for Economic and Social Affairs. “Rising borrowing costs and renewed capital‑flow pressures risk deepening debt vulnerabilities and constraining the resources available for sustainable development at a critical moment.”
Broad-based slowdown with uneven regional impacts
The impact of the crisis is highly uneven, with the most severe damage concentrated in Western Asia. Growth in the region is projected to plunge from 3.6 per cent in 2025 to 1.4 per cent in 2026, driven not only by the energy shock but also by direct infrastructure damage and severe disruptions to oil production, trade, and tourism.
Elsewhere, outcomes vary widely, shaped above all by exposure and the capacity to respond. The United States is expected to remain comparatively resilient, with growth projected at 2.0 per cent in 2026, broadly stable from 2025, supported by solid household demand and continued investment in advanced technologies such as artificial intelligence. Europe, by contrast, is more exposed, with heavy reliance on imported energy straining households and businesses. Growth in the European Union is projected to slow from 1.5 per cent in 2025 to 1.1 per cent in 2026, while the United Kingdom faces a steeper moderation, from 1.4 per cent to 0.7 per cent.
In Asia, China’s diversified energy mix, sizable strategic reserves, and proactive policy support are providing an important buffer, with growth projected to moderate from 5.0 per cent in 2025 to 4.6 per cent in 2026. India remains one of the fastest‑growing major economies, with output still expected to expand by 6.4 per cent, though the step‑down from 7.5 per cent in 2025 underscores the drag from higher energy import costs and tighter financial conditions.
In Africa, average growth is projected to ease only slightly—from 4.2 per cent in 2025 to 3.9 per cent in 2026—but this masks a deepening divide: oil and gas exporters are benefiting from elevated prices, while net energy importers face rising fiscal pressures from higher fuel and food costs. In Latin America and the Caribbean, most economies are relatively less exposed, yet the region remains on a low‑growth trajectory. Growth is forecast to slow from 2.5 per cent in 2025 to 2.3 per cent in 2026, constrained by weak investment and limited policy space.
Middle East crisis threatens development gains
The downgraded global outlook understates the true scale of the setback. The conflict in the Middle East threatens to reverse hard-won development gains and further slow progress toward the Sustainable Development Goals. Resulting price shocks are eroding food security, real incomes, and productive investment—heightening the risk of lasting social and economic scarring.
Low-income families bear the heaviest burden, as higher food and energy prices take up a larger share of their spending and rising costs outpace wages, increasing poverty. Yet the governments most in need of shielding vulnerable populations are the least equipped to do so: aid flows are declining sharply, rising debt-service costs are crowding out spending on health, education, and social protection, and fiscal space to respond is severely constrained.
On the environmental front, persistently high energy prices risk a short-term return to carbon-intensive fuels, even as they strengthen the longer-term case for accelerating the shift away from fossil-fuel dependence. Addressing these intersecting threats requires sustained multilateral action, including keeping trade open, expanding concessional finance, and supporting structural transformation. The Sevilla Commitment, the outcome of the Fourth International Conference on Financing for Development, provides a critical framework to scale up finance, address debt challenges and support the most vulnerable countries.
Renewed headwinds to productivity growth
Beyond these impacts of the Middle East conflict, the report draws attention to weakening foundations for medium-term growth. Global productivity growth has slowed since the global financial crisis, and current disruptions risk reinforcing this trend by dampening investment and trade flows. Across regions, widening gaps in capital accumulation, skills and innovation are contributing to increasingly uneven performance. Geopolitical fragmentation and constrained fiscal space risk further eroding productivity growth, entrenching existing divergences. Amid these headwinds, artificial intelligence offers significant potential but also poses considerable risks, with gains likely to be concentrated in a limited number of countries.
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It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using ‘Content here, content here’, making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for ‘lorem ipsum’ will uncover many web sites still in their infancy.
The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using ‘Content here, content here’, making
The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using ‘Content here, content here’, making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for ‘lorem ipsum’ will uncover many web sites still in their infancy.
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