The conflict in the Middle East has changed the picture for the global economy in ways that were hard to anticipate at the start of the year. Before hostilities broke out, things were looking reasonably steady. Growth in major economies was holding up, global trade was firming, and AI-related investment was providing an unexpected boost. That is no longer the case.
The World Bank now projects global growth at 2.5 percent in 2026 — the slowest since the COVID-19 pandemic. The single biggest driver is energy. Shipping through the Strait of Hormuz has been severely disrupted since early March. As a direct result, Brent crude is forecast to average $94 per barrel this year, up 36 percent from 2025. European natural gas prices are expected to rise around 30 percent. Fertilizer prices — closely linked to natural gas as a production input — have surged roughly 38 percent. Overall commodity prices are projected to rise by about 22 percent in 2026, a stark reversal from the 7 percent decline anticipated in January.
The inflation fallout is already visible. Global headline inflation is expected to hit 4 percent this year. Central banks that were on track to cut rates have shelved those plans. The U.S. Federal Reserve is now expected to raise rates by late 2026 or early 2027. Rate hikes are being discussed in the euro area and the United Kingdom. Bond yields have risen, currency pressures are building across emerging markets, and equity markets — after initial declines — have partly recovered, largely on continued AI optimism.
The impact is not uniform. The United States, a large oil producer, is proving relatively resilient, supported by fiscal easing and sustained technology investment. The euro area is more exposed, given its reliance on energy imports, and growth there is projected at just 0.8 percent. Japan faces a similar drag. China's growth is expected to slow to 4.2 percent, cushioned by large oil reserves, a high renewable energy share, and fuel price caps for households.
Emerging market and developing economies (EMDEs) are taking the harder hit. Growth in this group is projected to slow to 3.6 percent in 2026. Economies directly caught in the conflict face a near-complete growth collapse — from 3.9 percent in 2025 to roughly zero this year. Per capita income growth across EMDEs, excluding China and India, may fall to just 1.3 percent. That is not an abstraction. It means slower poverty reduction, tighter household budgets, and constrained government spending at a time when it is most needed.
The food security dimension deserves direct attention. The number of people in severe food insecurity across EMDEs excluding China rose by around 220 million between 2019 and 2025. Under the conflict's current trajectory, that figure could increase by a further 35 to 70 million by end-2028. Higher fertilizer costs, disrupted aid logistics, and the possible re-emergence of El Niño conditions are all factors making this worse.
The downside scenarios are not implausible. If energy disruptions last longer than the baseline assumes, and financial markets respond badly — equity price falls, widening credit spreads, capital flight from EMDEs — global growth could drop to just 1.3 percent in 2026. That is a recession-level outcome for much of the world.
AI remains the clearest upside in an otherwise difficult picture. Investment in computing infrastructure has continued regardless of the conflict. Countries embedded in AI-related supply chains — particularly in East Asia — are still recording steady export growth. Over the medium term, the productivity case for AI is real, though estimates range widely and most gains are still concentrated in advanced economies.
For policymakers, the report's message is essentially that there are no easy options. Central banks must weigh growth against inflation. Fiscal space is thin. Aid flows are declining — net ODA fell 23 percent in 2025, the largest single-year drop on record. And 1.2 billion young people in EMDEs are expected to reach working age by 2035, demanding jobs that current investment trajectories cannot reliably deliver.
The window to get this right is not staying open indefinitely.
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Written By Samyak Naik
