World Bank warns Middle East war could cut global growth to 1.3%

World Bank chief economist Indermit Gill warned on Tuesday that escalating hostilities between the United States and Iran could push global economic growth down to just 1.3% in 2026, less than half the 2.9% recorded last year, while driving global headline inflation to 4.5%.Investing.com+1

In an interview with Reuters, Gill said the worst-case scenario outlined in the World Bank's June forecast — in which energy supply disruptions prove severe and are accompanied by financial market stress — is moving closer to reality as the U.S.-Iran conflict enters its fifth month with no resolution in sight.TRADING ECONOMICS+1

Rising Risks for Vulnerable Nations

Gill has repeatedly sounded the alarm about the war's cascading effects on the world's poorest economies. In an earlier interview with AFP, the chief economist warned that roughly 300 million people already suffering from acute food insecurity could see that number rise by 20 percent as the crisis drags on. The blocking of the Strait of Hormuz has sent fertilizer prices soaring, threatening future harvests in countries already struggling with debt.yahoo+1

The combination of rising inflation and slowing growth poses what Gill has called a "double whammy" for heavily indebted developing nations, complicating their ability to service debts as borrowing costs climb. The World Bank's June Global Economic Prospects report downgraded growth forecasts for two-thirds of the world's economies.Reuters+2

Markets Rattled by Continued Escalation

Financial markets have been whipsawed by weeks of on-again, off-again hostilities between Washington and Tehran over control of the Strait of Hormuz. On Monday, major U.S. stock indexes fell, with the Dow Jones Industrial Average dropping more than 300 points as investors braced for further escalation. Oil prices have surged sharply this month, with Brent crude climbing more than 17% over the past month according to trading data.MarketScreener+1

The latest bout of instability follows a pattern that has repeated since early July, when President Donald Trump declared the ceasefire with Iran "over" and the U.S. launched fresh strikes against Iranian military targets. Iran retaliated by targeting U.S. installations in Bahrain and Kuwait, and the cycle of attacks has continued with a new wave of U.S. strikes on Iranian positions as recently as July 15.CNBC+2

The World Bank's baseline forecast of 2.5% global growth already represents the slowest pace since the COVID-19 pandemic. Gill's warning suggests even that diminished outlook could prove optimistic if the conflict continues to intensify.RTÉ+1