Economic Update: Middle East

Economic Update: Iran war dents GCC outlook

The escalation of geopolitical tensions has led to a material reassessment of the GCC economic outlook for 2026. While the global impact is expected to remain relatively contained, primarily through energy price volatility, the regional effects are more pronounced given the GCC’s exposure to trade flows, energy markets and international travel. We now expect a slight decline in GCC GDP this year, with the pace of recovery conditional on the duration and trajectory of the current situation. The impact across the region is expected to be uneven, with more trade-and tourism-exposed economies facing greater near-term disruption. However, we continue to expect a recovery in activity once conditions stabilise, supported by the region’s strong economic fundamentals and long-term investment appeal.

• The GCC economy faces a small contraction this year as the Iran war drags on
• Impact will vary across the region, with externally exposed sectors and economies most affected in the near term
• Beyond the energy trade, tourism and travel will face the most sustained disruption before recovery takes hold

The Iran conflict has ushered a new energy price shock, prompting a broad-based reassessment of the global economic outlook. Global GDP is now expected to grow by 2.6% this year, pushing it outside the tight 2.8%-3.0% range of the past three years. The Middle East fares significantly worse, with the GCC countries, Iran and Iraq most affected. We now expect Middle East GDP will shrink by 2.2% in 2026 (we forecast 3.6% expansion three months ago), following last year’s estimated gain of 3%. Our outlook is set against our expectation that constraints on regional energy production will persist through April and will partially ease in May-June. A more drawn-out conflict would worsen the economic impact on the regional and global economy. We recognise that these projections sit against a backdrop of significant uncertainty and concern across the region, and outcomes will ultimately depend on how the situation evolves in the coming weeks.

We expect the GCC countries to suffer a hit to growth with a notable reduction in the regional 2026 GDP growth forecast by 4.6ppts relative to three months ago to -0.2%. We assume energy trade flows and output will normalise gradually once hostilities cease, though sentiment impact will linger, dampening the rebound in travel and tourism this year. The impact will vary across the GCC, with economies more exposed to trade and tourism facing greater near-term disruption. We expect a strong catch-up in regional growth next year and have raised our 2027 GCC GDP forecast by 4.3ppt to 8.5%.

Chart 1: Real GDP growth

Energy trade disruption will cause the largest immediate impact for most GCC economies outweighing any benefits from higher energy prices. Oil prices have been highly volatile since the conflict escalated. Brent has traded above $100pb since mid-March, following attacks on regional energy infrastructure and severe disruption to shipping through the Strait of Hormuz. The revised baseline forecast assumes that oil prices average $113 per barrel in Q2 and converge to the pre-crisis anticipated path by 2028. Gas markets face a sharper shock, against the backdrop of a prolonged halt in Qatar’s LNG production, with prices across key gas benchmarks approximately 60% above our baseline three months ago.

Transit through the Strait of Hormuz has been significantly disrupted, reflecting security risks and prohibitive insurance costs. Transit looks unlikely to start recovering before May, with trade disruption easing slowly through the rest of 2026. Around 7mbpd of the 18mbpd that normally transits the Strait is being rerouted through Saudi Arabia’s East-West Pipeline and the UAE’s Habshan-Fujairah pipeline. Bahrain, Kuwait, and Qatar have no feasible way to bypass the waterway, forcing them to halt production as storage capacity is exhausted. Although we expect exports to be more negatively impacted than production, storage capacity constraints underpin our expectations of significant near-term declines in output across GCC hydrocarbon sectors. We expect recovery to start as soon as vessels can pass the Strait safely, while forecasting a 5.8% decline in GCC oil sectors this year (similar to the decline in 2017). We project a strong pick up of 18.2% next year.

The damage to travel and tourism, both key growth engines in recent years, will likely linger for longer. The conflict has triggered airspace closures and widespread flight cancellations, disrupting regional and global travel. Although flights are gradually recovering across the region, our Tourism Economics team early estimates showed arrivals to the Middle East declining by 11%-27% y/y this year, compared to a December baseline that projected 13% growth. In absolute terms, this equates to 23-38 million fewer international visitors and a loss in visitor spending of $34-$56bn with recovery expected to follow as regional stability returns and travel confidence rebuilds.

We have revised down our hither to upbeat outlook for GCC consumer spending expecting a rise in precautionary savings amid reduced consumer sentiment and higher inflation. We have cut our forecast for household consumption growth by 2.6ppt for 2026 to 1.4% compared to three months ago and raised our 2027 projection by 2ppt to 6%. Softer domestic demand momentum will limit growth across GCC non-energy sectors to just 0.1% this year (4.2% previously) before rising to 6.4% in 2027 (4.0% before).

Security concerns will drive greater business and investor caution in the near-term, with a moderation in real-estate activity, particularly in more internationally exposed markets such as Dubai, likely. That said, we see no permanent damage to GCC's attractiveness as a global business and investment hub and think the conflict should eventually lead to increased efforts and capital allocation towards strategically important sectors such as financial services, AI and technology, and healthcare.

The impact on regional public finances will be uneven. Oman and Saudi Arabia, which face fewer export constraints, will likely see a boost to their fiscal positions and smaller deficits thanks to higher oil prices, while those facing blockages will lose out. Bahrain, and Qatar see the biggest downgrades, owing to their loss in ability to export, and for Qatar due to damage to LNG production capacity. Note, even with the significant downgrades to Qatar will run a sizeable surplus, following a deficit last year. Meanwhile, we project government spending to increase in most countries this year and next. Some support will be offered to help populations and we can expect to see measures to support national resilience and security priorities. Overall, we expect an improvement in the GCC fiscal position this year after a deterioration in 2025.

Financial conditions have tightened as investors seek compensation for the rise in geopolitical risk. This may deter some private foreign direct investment in the short term, but the region’s structural investment case is strong enough to warrant a swift recovery. Equity market performance has diverged across the GCC, consistent with the expected uneven economic impact. Dubai and Abu Dhabi indices have fallen sharply since the conflict began, reflecting their greater exposure to trade, tourism and logistics disruptions. By contrast, markets in Oman and Saudi Arabia have been more supported.

We expect no lasting damage from the war to the region’s strong credit profiles and the financing outlook. Gulf sovereigns and government-affiliated entities will likely return to international debt markets once the outlook settles to raise funds for long-term development plans. Saudi Arabia has again led the way this year, selling bonds worth US$11.5bn in January against the approved US$58bn borrowing plan.

We expect the disruption in the Strait and the rerouting of goods imports to drive up costs, so we have raised our forecast for GCC annual CPI inflation by 0.2ppts to 2.5% for 2026. We expect inflation pressure to be temporary, with average inflation easing to 2.4% in 2027. However, there's a risk that concerns over security lead to a slowdown in net inward migration, which could raise wage pressures, keeping headline inflation rates higher for longer.

Chart 2: Annual CPI inflation forecasts

We have kept our end-2026 interest rate forecasts unchanged in the last three months. The US Federal Reserve held its policy rate steady in Q1 after a 25bp cut in December, with GCC central banks following, consistent with their US dollar currency pegs. Our forecast assumes two quarter-point cuts for the US by year-end and we expect most regional short-term rates to ease in tandem, supporting investment objectives. Unfavourable inflation surprises could lead to a more cautious approach, especially in Kuwait and Qatar.

Elsewhere in the Middle East, the Iranian economy faces a sharp contraction, which we estimate at 9.4% this year, and an uncertain post-war political trajectory. Damage to Iranian oil facilities under most conflict scenarios points to reduced Iranian production for the remainder of 2026, while non-oil sectors are also severely disrupted by war. Meanwhile, Lebanon faces renewed Israeli strikes, occupation in the south of the country and forced displacement of 20-25% of the population, which threaten recovery prospects this year. This is despite some support to regional activity and exports from Syria’s reconstruction.