War’s grip on Middle East economies tightening, IMF says

• US-Iranian hostilities continue
• Hormuz traffic a third of pre-war levels
• ‘Trade fragmentation could accelerate’

The International Monetary Fund has again downgraded this year’s growth prospects for the Middle East and Central Asia due to continued threats to shipping through the Strait of Hormuz.

Gross domestic product for the wider region is now expected to expand by only 0.7 percent in 2026, 1.2 percentage points less than the IMF’s forecast in April.

However, growth should rebound strongly in 2027, at a pace of 6.5 percent, or nearly 2 percentage points above the most recent World Economy Outlook (WEO) forecast.

The latest projections are based on the assumption that the Strait of Hormuz will begin reopening in mid-July and that traffic will return to its prewar levels by March 2027.

Some ships have resumed transiting the waterway since an interim US-Iran peace deal came into effect last month, but their numbers are still only about a third of what they were before the war broke out on February 28, according to figures from industry platform Kpler.

Vessels are still coming under Iranian fire when they refrain from following Tehran’s approved corridor. The US responded with “a series of powerful strikes”.

“The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices and weigh on financial conditions,” the IMF warned in its WEO update. “Trade fragmentation could accelerate, possibly hurting output and increasing prices.”

Energy prices remain around 25 percent higher than they were before the war, but they have cooled since an interim US-Iran peace deal was agreed last month. As such, the fund now projects an average annual crude spot price of $78 per barrel, below the $82-100 range it had predicted in April.

“Iraq, Kuwait and Qatar – commodity producers most affected by disruptions to energy output and transport – are projected to experience sharp contractions of their economies in 2026, followed by double-digit expansions in 2027,” the IMF said.

Saudi Arabia has proven more resilient thanks to its ability to funnel exports through alternative routes, and its economy is expected to expand by 1.7 percent in 2026, still down 1.4 percentage points from the April WEO, and 5.5 percent next year.

“Commodity importers in the Middle East and North Africa are expected to remain relatively resilient to the negative terms-of-trade shock from higher energy and food prices,” the IMF said.

Global growth is expected to stay below the average from the past two years, at a 3 percent pace this year and 3.4 percent in 2027. This is broadly unchanged from the most recent WEO forecast.

The opposing forces of the Middle East war and the artificial intelligence revolution are, essentially, balancing each other out, at least for the time being and with wide variations from country to country, according to the fund.

• Frank Kane: Qatar is an economic loser regardless of the peace talks
• The Saudi dilemma: a good war but a hard peace
• Diversification and defence: how conflict will reshape Gulf economy

“Energy exporters outside the conflict zone benefit from favorable terms of trade, whereas economies plugged into the technology-led upturn experience stronger activity even if they are energy importers,” the IMF said.

“In contrast, activity weakens for energy importers with limited participation in the technology value chain, a group that includes many low-income countries.”

Headline inflation was revised upward from April, if only slightly, and is now forecast to go from 4.1 percent last year to 4.7 percent in 2026 and 3.9 percent in 2027.

“These projections indicate that the disinflation trend in place since the beginning of 2024 has stalled,” the IMF noted in the report.