World Bank Warns of Slowest Global Growth Since COVID as Middle East Energy Shock Reshapes the Economic Map

The global economy is confronting its most serious growth shock since the pandemic, driven by an energy crisis triggered by the Middle East conflict that has rewritten the forecasts of every major international institution. The World Bank's June 2026 Global Economic Prospects report projects global growth decelerating to 2.5% in 2026, down from 2.9% in 2025, the weakest expansion since the COVID-19 crisis. The institution cited weaker prospects for energy-importing economies and those directly affected by the conflict, with activity expected to firm only in 2027–28 as energy supplies recover, monetary easing resumes, and trade strengthens. The OECD, in its own June outlook, set out two scenarios: a time-limited disruption in which Gulf energy production progressively returns to pre-conflict levels from mid-2026, and a prolonged disruption scenario that would see global growth slump to just 2.1% in 2026 and 1.8% in 2027. Under the more benign scenario the OECD still projects global growth falling to 2.8% in 2026 from 3.4% in 2025.

The energy shock has operated through multiple transmission channels simultaneously, compounding the damage far beyond oil prices alone. IFM Investors' chief economist Alex Joiner noted in the firm's June economic update that higher fuel prices are flowing through to transport, food, and fertiliser costs, while shipping and insurance premia have risen as trade routes have been disrupted and business confidence has been undermined by persistent uncertainty about escalation. Long-end bond yields across advanced economies have moved to levels not seen in nearly 20 years, as investors have repriced inflation, fiscal, and central bank risks in tandem. The OECD warned that inflationary pressures are rising in both advanced and emerging market economies, with consumer price inflation in the G20 collectively expected to reach 4.0% in 2026 — up from 3.4% in 2025 — before easing to 3.1% in 2027 as energy and food price pressures fade, assuming the conflict does not persist.

The divergence in economic fortunes across the world has rarely been so stark. The OECD Secretary-General Mathias Cormann emphasised that the longer disruptions last, the larger the economic and social costs become, calling for any fiscal support to be temporary and targeted at those most in need. Vanguard downgraded its 2026 UK GDP forecast by 0.4 percentage points to 0.6%, reflecting the country's acute sensitivity to energy import prices. The ECB, which had cut its deposit facility rate from 4% to 2% between June 2024 and June 2025, held rates steady at its April meeting, acknowledging that the war had led to a sharp increase in energy prices pushing up inflation and weighing on economic sentiment. Meanwhile, countries with domestic energy production — most notably the United States — have faced a more muted impact. J.P. Morgan's Hawk-Dove Score, which synthesises central bank speeches and policy statements globally, has risen sharply since the start of the year, reflecting a broadly hawkish shift, with the Reserve Bank of Australia having already delivered three consecutive rate hikes since the onset of the conflict.

Emerging markets and developing economies face a particularly vicious combination of pressures. The IMF's debt-to-GDP ratios for these countries have risen from 54.5% in 2019 to 69.5% in 2024, with projections pointing to 76.7% by 2026, according to analysis by Capital Markets Intelligence citing IMF data. The IMF itself reported that 53% of low-income developing countries and 23% of emerging markets were at high risk of debt distress or already in distress, figures that predate the latest energy shock. Local-currency bond yields and external bond spreads have remained elevated in commodity-importing developing economies, as the World Bank noted, reflecting the most adverse impacts of the conflict landing on the countries least equipped to absorb them. The OECD's prolonged disruption scenario projects OECD-wide growth of just 0.9% in 2026 and 0.5% in 2027, a trajectory that would constitute the worst peacetime economic performance for advanced economies since the early 1980s.

Against this sobering backdrop, pockets of resilience offer some longer-term reassurance. The OECD's Secretary-General Cormann urged policymakers to lay the foundations for stronger productivity by improving the business environment, enhancing skills, and unlocking the benefits of AI and other transformative technologies — a recognition that the current shock has exposed structural vulnerabilities that must be addressed. The World Bank concurs that activity is expected to firm in 2027–28, conditional on a resolution of the conflict and a gradual unwinding of energy disruptions. For now, the defining macro question for the remainder of 2026 is whether the Strait of Hormuz remains open long enough to allow oil prices to stabilise — and whether central banks can engineer a soft landing in economies where inflation has already become deeply embedded. The answer will determine not only the growth trajectory of the next two years but the social and political stability of dozens of nations caught in the crossfire of forces they did not create.