World Bank and OECD Warn of Slowest Global Growth Since COVID as Middle East Conflict Reshapes the Economic Map

Global economic growth is now projected to slow to 2.5 percent in 2026 — the weakest pace since the COVID-19 pandemic — according to the World Bank's June 2026 Global Economic Prospects report. The institution attributed the deceleration squarely to the Middle East conflict, which has triggered sharp energy price increases, renewed inflationary pressures, and expectations of tighter monetary policy across both advanced and emerging economies. The OECD, in a separate and equally sombre assessment, projected global growth of just 2.8 percent under a time-limited disruption scenario, but warned that a prolonged disruption could drag global expansion down to 2.1 percent in 2026 and as low as 1.8 percent in 2027, leaving a lasting mark on Asia, Europe, and the developing world most exposed to food and energy price shocks.

The OECD's Secretary-General Mathias Cormann stated that the global economy entered 2026 with robust momentum but that the outlook had weakened significantly since the conflict's escalation, with effects likely to be felt for some time. Under the baseline scenario, OECD GDP growth is projected at just 1.5 percent in 2026. The energy shock is transmitting its damage through multiple channels simultaneously: higher fuel prices are feeding through to transport, food, and fertiliser costs; shipping and insurance premia are rising as trade routes are disrupted; and business and consumer confidence is being undermined by persistent uncertainty about escalation risk, according to IFM Investors. G20 consumer price inflation is expected to rise collectively to 4.0 percent in 2026, up from 3.4 percent in 2025, before easing only in 2027 as energy pressures fade, the OECD noted.

Emerging market and developing economies face the sharpest pain. The World Bank reported that these economies are experiencing their weakest per capita income growth since the pandemic, with growth decelerating across all major developing regions in 2026. The Middle East, North Africa, Afghanistan, and Pakistan are the worst affected, while South Asia remains the fastest-growing major region, though at reduced momentum. Rising debt is simultaneously driving up borrowing costs for the most indebted developing economies, the World Bank warned, underscoring an urgent need for stronger revenue mobilisation and improved debt management. The institution's Chief Economist Indermit Gill wrote that barring a dramatic change in trajectory, the 2020s are on course to become a lost decade for far too many developing economies, with nearly half of all developing countries failing since 2019 to narrow the income gap with the world's most prosperous nations.

The one counterweight to this gloomy picture is the AI investment boom, which is providing a partial buffer in select economies. Taiwan's government now expects its economy to grow 9.6 percent in 2026 — what would be the highest rate in sixteen years — on the back of massive demand for advanced semiconductors crucial to AI infrastructure, according to Deloitte Insights. South Korea's new central bank governor estimated that strong AI-related chip exports will add 0.7 percentage points to real economic growth this year, more than offsetting the negative impact of higher oil prices, also per Deloitte. China's exports of semiconductors surged 110 percent year-on-year in May, with overall exports up 19.6 percent, driven substantially by AI-related demand — a second-largest increase since January 2022, Deloitte noted.

The divergence between the AI-driven economies of East Asia and the energy-squeezed importers of Europe and the developing world is becoming the defining fault line of the 2026 global economy. The OECD's Secretary-General called on governments to ensure any fiscal support is targeted to those most in need and strictly temporary, to avoid compounding already elevated public debt burdens. The World Bank added that broader AI adoption represents meaningful upside potential, but only if policymakers act now to lay the institutional, educational, and infrastructure foundations needed to seize it. As the Middle East situation remains unresolved, the distance between those two economic worlds — the fast AI lane and the slow energy-shock lane — is widening by the quarter.