Middle East conflict is biggest threat to global economic outlook, WEF warns

The World Economic Forum warns that the Middle East conflict poses the greatest threat to global economic outlook, surpassing concerns over asset bubbles and trade turmoil. The ongoing war, now in its seventh month, could generate significant economic headwinds over the next year, particularly due to Iran's persistent attacks on commercial vessels in the Strait of Hormuz.

This narrow waterway, crucial for approximately a fifth of global oil and gas supply, has seen a sharp decline in vessel traffic, which could have direct repercussions for the global economy.

Geopolitical uncertainty is cited by 97% of surveyed chief economists as the most pressing concern, far outweighing other potential threats. The escalating attacks by Ukraine and Russia on Black Sea ports and shipping operations could further disrupt seaborne grain exports from major suppliers, reducing global cereal exports by up to 17% this year.

The US-Iran conflict, which began on February 28, has led to waves of drone and missile strikes on Iran's Arab neighbors and the closure of the Strait of Hormuz, severely impacting sectors such as hospitality, aviation, and tourism.

Despite several rounds of mediated negotiations, a peace deal or method to open the strait remains elusive. The International Monetary Fund has reduced its 2026 growth forecast for the Middle East to 0.7%, a significant 1.2 percentage point downgrade from April. Saudi Arabia's economy contracted by 4.8% in the second quarter of the year, with oil activity declining by 24.7% and non-oil activity increasing only by 0.9%.

Iran's economy is expected to shrink by 5.4% this year. Economic expectations for inflation have softened, with 62% of respondents anticipating moderate inflation and 27% foreseeing high or very high inflation over the next 12 months, compared to 55% in May. The WEF emphasizes that the broader outlook remains vulnerable to disruptions in energy production and transport flows.