The prolonged Middle East conflict is expected to push the region’s economy into contraction in 2026, although growth could rebound more strongly than previously forecast next year, according to the International Monetary Fund.
Economies across the Middle East and North Africa (MENA) and Central Asia are projected to shrink by 0.3% this year before expanding by 6.3% in 2027, the IMF said in its latest World Economic Outlook, released in Bangkok on Tuesday.
The projections mark a downward revision of 2.2% for 2026 and an upward revision of 1.7% for 2027 compared with the Fund’s April outlook.
The revised forecasts reflect the prolonged closure of the Strait of Hormuz and an expected recovery in economic activity once the critical shipping route reopens, the IMF said.
The US-Israeli conflict with Iran has entered its eighth month, continuing to disrupt commercial shipping through the strait. A brief pause in June, when an interim peace agreement allowed vessels to transit safely, provided only temporary relief.
Gulf Economies Face Sharp Contractions
Bahrain, Iraq, Kuwait and Qatar are projected to experience double-digit economic contractions in 2026, followed by double-digit expansions in 2027 as energy production, exports and logistics return to normal, according to the IMF.
The four economies are particularly exposed to disruptions to energy output and transportation, leaving them vulnerable to prolonged restrictions on shipping through Hormuz.
Saudi Arabia is expected to fare comparatively better because of its more diversified energy export routes. Nevertheless, the IMF forecasts a 3.3% contraction in the Saudi economy this year, followed by growth of nearly 8% in 2027.
The latest projections represent a significant deterioration from the Fund’s April outlook, which anticipated contractions in Kuwait, Qatar and Bahrain but continued growth in Saudi Arabia, the UAE and Oman.
The IMF now expects substantial economic contractions across the Gulf in FY26, with Oman the only exception.
Renewed Houthi Attacks Threaten Saudi Outlook
The IMF’s underlying assumptions do not appear to account for the renewed hostilities between Saudi Arabia and Yemen’s Houthi militia.
The Iran-backed group has repeatedly targeted Saudi energy facilities and civilian infrastructure in recent weeks, including Riyadh’s main international airport.
The attacks have caused multiple fatalities and left hundreds injured, raising concerns about the Kingdom’s expanding aviation sector and broader investor confidence.
The timing is particularly sensitive for Saudi Arabia, which is hosting a busy international conference season as it seeks to attract foreign investment and diversify its economy.
Speaking at the opening of the WPC Energy Congress in Riyadh this week, Energy Minister Prince Abdulaziz bin Salman Al Saud said the capital remained safe. The Minister also reiterated Saudi Arabia’s commitment to investing in oil and gas infrastructure that would allow the Kingdom to bypass the Strait of Hormuz.
Oil and Gas Prices Remain Elevated
The IMF’s latest projections assume the Strait of Hormuz reopens in March 2027, with conditions gradually returning to pre-war levels over the following year.
Crude oil prices are expected to average 41% higher in 2026 than in 2025, while natural gas prices are projected to rise by 48%, based on an extrapolation of data from September 21, the Fund said.
Despite the disruption to energy markets, the IMF left its global growth projections largely unchanged from April.
The resilience reflects measures taken by the energy industry to mitigate the impact of the prolonged disruption, including rerouting exports, increasing production outside the Gulf and drawing down inventories.
A global investment boom driven by artificial intelligence has also supported economic activity and international trade, the IMF said.
The outlook for the Gulf nevertheless remains closely tied to the duration of the conflict, the reopening of Hormuz and the pace at which regional energy production and export networks can recover.
Stay Up to Date with the Latest Updates at Finance ME
How Al Masraf Is Building Islamic Trade Finance Corridors
EDGE’s Rodrigo Torres on Risk, Sovereignty and Defence Finance in a Multipolar World
Presight AI to Expand Kazakhstan AI Hub, Open Azerbaijan Office
