The World Bank has issued a stark warning that global economic growth will decelerate to 2.5% this year, marking the weakest performance since the COVID-19 pandemic, as the ongoing war in the Middle East drives up inflation and borrowing costs.
In its latest Global Economic Prospects report, the Washington-based development bank downgraded growth forecasts for two-thirds of countries worldwide. The bank estimated that global growth stood at 2.7% in 2025.
Even if the disruption to oil flows through the Strait of Hormuz—a critical shipping channel—eases next month, the World Bank predicts global inflation will rise to 4% in 2026, a significant increase from 3.3% in 2025.
Average fertiliser prices are expected to surge by as much as 38% this year due to supply disruptions through the strait and shortages of raw materials for fertiliser production from the Gulf region.
The World Bank argued that developing countries, excluding India and China, will have endured a decade without narrowing the economic gap with advanced economies after this latest setback. It stated that, barring a miracle, the 2020s will be a "lost decade" for these nations.
The bank announced it is making up to $100 billion available over the next 15 months for the countries most affected by the war's knock-on effects, aiming to help them weather the crisis.
With the ceasefire between the United States and Iran appearing increasingly fragile in recent days, the World Bank warned of a potential further deterioration in the economic outlook. "A renewed escalation of hostilities or more prolonged disruptions to commodity flows could further raise commodity prices, intensify inflationary pressures and food insecurity, trigger financial stress and lower growth," it said, adding that in such a downside scenario, global growth could fall to just 1.3%.
World Bank President Ajay Banga commented, "Developing countries have faced a series of challenges over the last decade. The impact differs by country, but the basic test is the same: protect people and preserve stability today, without giving up on growth and jobs tomorrow." He added, "In response to the current shock, we are providing liquidity where it is needed now—and we are ready with additional financing, guarantees, and private-sector solutions if pressures deepen."
Growth in Gulf economies is expected to plummet from 4.5% last year to just 1.3% in 2026, before rebounding strongly next year as oil flows resume and reconstruction efforts begin.
In his foreword to the report, World Bank Chief Economist Indermit Gill highlighted three reasons for optimism that growth in developing economies could accelerate in the coming decade: increased regional trade, the clean energy revolution, and artificial intelligence. However, he cautioned that the benefits of AI are heavily skewed toward wealthy nations, with less than a quarter of data centres currently located in developing economies. "The languages of roughly half the world's people remain poorly represented in the data that trains the models," he noted. "Unless such gaps are closed, the AI revolution could widen rather than narrow the gap between rich and poor countries."
The report also warned about the "rising challenge" of government indebtedness in developing countries, which hampers politicians' ability to cushion the public from economic shocks. The World Bank pointed out that since 2010, aggregate government debt in developing countries has increased from 40% of GDP to 70% of GDP, and higher pre-existing debt levels tend to push interest rates up further.
Campaigners have been urging developed country governments to do more to help the world's poorest nations manage their increasingly unmanageable debt burdens. Recent research by the advocacy group Development Finance International found that the G77 group of developing countries spends $8 trillion annually on debt servicing, equivalent to 35% of government spending.
