World Bank Warns of Slowest Global Growth Since COVID-19 as Middle East Conflict Reshapes Economic Order

The global economy is on course for its weakest expansion since the onset of the COVID-19 pandemic, the World Bank warned in its June 2026 Global Economic Prospects report. The Washington-based institution slashed its 2026 growth forecast to just 2.5 percent, down sharply from 2.9 percent recorded in 2025, with projections downgraded for fully two-thirds of the world's economies. The proximate cause is unambiguous: the conflict triggered by the US-Israeli strikes on Iran in late February, which shut the Strait of Hormuz — a chokepoint through which roughly a fifth of global crude oil and liquefied natural gas typically flows — and sent energy prices soaring to as high as $120 per barrel in March. The World Bank's managing director for operations, Anna Bjerde, told The National that the Iran war will "weigh heavy on growth" as its effects ripple well beyond the immediate combatants and into every energy-importing economy on the planet.

The human and economic cost is most acute in the Gulf. Economies in the region directly affected by the conflict are forecast to grow at close to zero in 2026, a dramatic reversal from the 3.9 percent recorded a year earlier, according to the World Bank's report. The Strait of Hormuz has remained largely shut as US-Iran ceasefire negotiations continue under fragile terms, with both sides enforcing a de facto blockade. Higher fuel prices are cascading through transport, food, and fertiliser costs, while elevated shipping insurance premia compound the damage to global supply chains, as IFM Investors noted in its second-quarter economic update. The OECD has separately outlined two scenarios: a time-limited disruption in which Gulf energy exports gradually recover from mid-2026, and a prolonged disruption stretching into 2027, which would push global growth down to a punishing 2.1 percent and OECD-wide growth to just 0.9 percent in a single year.

Emerging market and developing economies are bearing the sharpest end of the shock. Growth in these countries is expected to decelerate to a post-pandemic low of 3.6 percent in 2026, down from 4.4 percent in 2025, according to the World Bank. Per capita income growth in developing economies excluding China and India risks stagnating for nearly a decade, with the bank warning that by 2028 these nations will have made virtually no progress in narrowing their income gap with the advanced world. Sub-Saharan Africa faces compounding pressure from soaring food prices linked to fertiliser supply shortages, while South Asia, despite remaining the world's fastest-growing region at a forecast 6.3 percent in 2026, is not immune to slippage from the 7 percent recorded in 2025. In a severe downside scenario involving both prolonged energy disruptions and significant financial market stress, global growth could collapse to just 1.3 percent, the World Bank cautioned.

The policy response from the world's central banks has been anything but uniform, adding another layer of volatility. The US Federal Reserve held its benchmark federal funds rate at 3.50–3.75 percent at its June 17 meeting — the fourth consecutive hold — but under new Chair Kevin Warsh, the institution stripped its policy statement of all forward guidance pointing toward cuts, shortened the statement from 341 words to just 130, and raised its inflation forecasts for 2026 to 3.6 percent on headline and 3.3 percent on core, up from 2.7 percent in March projections. The Fed's dot plot now points to a median rate of 3.8 percent by year-end, with nine officials projecting at least one hike, according to CNBC. The European Central Bank moved more decisively, raising its key deposit rate to 2.25 percent at its June 11 meeting — its first increase in over a year — explicitly citing Middle East-driven inflationary pressures, while the Bank of England held at 3.75 percent with two of nine Monetary Policy Committee members voting to raise.

The durability of the conflict will determine whether the world economy stabilises or deteriorates further. The World Bank projects a recovery to 2.8 percent global growth in 2027 if energy supplies normalise and trade strengthens, though this would still leave the world economy 0.4 percentage points below its average growth rate of the 2010s — a reminder that even the baseline recovery scenario implies lasting scarring. The OECD's Secretary-General Mathias Cormann urged governments to ensure any fiscal support is targeted and temporary "to avoid a further increase in public debt." The World Bank, for its part, has pledged immediate access to $50–60 billion in financing for affected developing countries, with the potential to scale to $80–100 billion over 15 months. The race between diplomacy, energy market stabilisation, and the persistence of inflationary pressures will define the global macroeconomic narrative for the remainder of 2026 — and the margin for policy error has rarely felt so thin.