The International Monetary Fund has significantly lowered its 2026 projections for economies across the Gulf due to the prolonged closure of the Strait of Hormuz, and pushed back its forecast on the waterway's reopening.
In its latest World Economic Outlook, released on Tuesday, the IMF also slashed its forecasts for the broader region. The Middle East and North Africa economy is estimated to contract by 2 per cent this year, a downward revision of 3.1 percentage points from its April projections. It is the only region expected to record an economic contraction this year.
The IMF maintained its 2026 forecast for global growth at 3.1 per cent and lifted its projection for 2027 from to 3.4 per cent.
“This is the net result of two main forces that are shaping the outlook,” IMF chief economist Silvana Tenreyro told reporters, referring to the negative supply shock from the Iran war and the positive demand shock from the AI infrastructure boom.
The fund said the global economy had so far been able to withstand the impact from the Iran war energy shock due to a combination of factors including supply adjustment, a drawdown of inventories, lower energy intensity, and households and companies adapting to higher prices.
The latest forecasts come as Saudi Arabia vowed to press on with bringing its oil supplies to market despite escalating attacks on the kingdom in recent days by the Iran-backed Houthi rebels.
The number of vessels transiting the Strait of Hormuz have declined in recent days after tanker attacks reached their highest weekly count this year on October 9. One tanker crossed the waterway on Saturday, down from eight the day before, data from analytics firm Kpler showed.
Confirmed total Hormuz clearance stands at roughly 11.9 million barrels per day, or about 30 per cent below its pre-war baseline, Kpler data showed, although daily readings have swung wildly.
Energy supply disruptions from the Iran war are the latest in a round of shocks the global economy has weathered in recent years. These have included the 2025 tariffs row, Russia's 2022 invasion of Ukraine, the Covid-19 pandemic and the global tightening cycle that followed.
“The economy has been resilient, but that resilience is reaching its limits,” Ms Tenreyro said. “The task ahead is to move from coping to rebuilding, restoring fiscal space and rebuilding supply-side resilience.”
The economy has been resilient, but that resilience is reaching its limits
Silvana Tenreyro, IMF chief economist
The fund said the economic outlook is highly uneven across countries, reflecting differences in their exposure to commodities, AI-related activity and borrowing costs.
Overall GDP growth in the US is forecast to be 2.3 per cent, compared to 1.1 per cent for the euro area, 1.3 per cent for the UK, 0.7 per cent in Japan and 1.1 per cent in Canada.
Growth in China, which is classified as an emerging economy, is forecast to slow to 4.5 per cent growth in 2026, compared to 7 per cent for India and 3.6 per cent for Pakistan.
Gulf outlook
The IMF projects the UAE's economy to contract by 3.9 per cent this year before rebounding at a 7.7 per cent growth rate in 2027, conditional on the normalisation of shipping routes and the reopening of the Strait of Hormuz.
The new projections for the Middle East's second-largest economy reflect a downgrade of 7 percentage points for 2026 and an upgrade of 2.4 percentage points for 2027 compared to the fund's April forecast.
Bahrain, Kuwait and Qatar are forecast to see double-digit contractions of 11.3, 16.7 and 15.6 per cent, respectively, in 2026.
The fund also lowered its forecasts for Saudi Arabia, but expects the decline to be less sharp compared to Bahrain, Kuwait and Qatar because of its diversified export routes. The fund expects Saudi Arabia to slow from a positive growth rate of 4.6 per cent last year to a 3.3 per cent contraction this year.
Oman is the only GCC member to see positive economic growth in 2026 at 4.1 per cent.
The latest forecast assumes the gradual reopening of the Strait of Hormuz will resume in March 2027, with a return to prewar conditions by October. It also notes that uncertainty is assumed to remain elevated throughout next year.
Under these conditions, oil exporters are expected to see economic activity rebound next year, similar to the UAE. Overall GDP growth in Bahrain, Kuwait and Qatar would expand by 13.9, 17.1 and 18.8, respectively, the fund said. Saudi Arabia's economic activity would accelerate at a 7.9 per cent pace. The kingdom's ministry of finance last week said its economy was forecast to grow by 12.8 per cent next year.
Other oil exporters also faced downgrades for 2026 including Iraq at minus 16 per cent and Iran at minus 7.6 per cent, with the latter also impacted by enhanced sanctions and a US naval blockade.
Meanwhile, the fund said importers in the region were expected to remain relatively resilient. Egypt's economy is forecast to expand by a 5.1 per cent pace in 2026, more than 8 percentage points lower than the IMF's April forecast. Morocco's economy is set grow by 4.5 per cent and Jordan's by 2.7 per cent. The fund did not submit projections for Lebanon.
Conflict and AI boom lift inflation
The fund said that while the Iran war and AI buildout were driving growth in opposite directions, both were adding to inflationary pressures.
Global headline inflation is set to increase to 4.7 per cent in 2026 before easing to 4.1 per cent in 2027, a cumulative upwards projection of 0.7 percentage points.
Ms Tenreyro said this was driving up borrowing costs in advanced economies at a time when public debt was already high. The US Federal Reserve and other central banks in advanced economies have already begun raising interest rates or are expected to this quarter.
“This interaction of high debt and high financing costs, in turn, has heightened fiscal concerns and risks,” Ms Tenreyro said.
Global bonds have been under significant pressure in recent weeks over fears of higher energy prices, higher-for-longer interest rates and concerns over unchecked government spending.
The yield on the 10-year US Treasury, a benchmark for global borrowing costs, has recently traded at its highest level since 2002. Bonds in Japan, France, Germany and the UK have also recently hit multi-decade highs.
Pimco, a global investment management firm, warned last week the yield on the 10-Year Treasury could hit 6 per cent for the first time since 2000.