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An escalating conflict in the Middle East could drag global economic growth down to just 1.3 per cent in 2026, less than half of last year’s 2.9 per cent, if hostilities between the United States and Iran continue for six months or longer, World Bank’s chief economist Indermit Gill has warned.
In an interview with Reuters, Gill said the World Bank had outlined three possible scenarios in its June global economic outlook, but the worst-case projection is now increasingly plausible as tensions in the region continue to intensify.
Under this scenario, global headline inflation could climb to 4.5 per cent, driven by rising energy prices, disrupted trade routes, and supply chain shocks.
Gill said prolonged fighting and damage to oil infrastructure in the Middle East could also disrupt supplies of fertilizers, helium, and sulphur, creating ripple effects across global agriculture and worsening food insecurity, particularly in vulnerable economies.
Higher inflation could force central banks to keep interest rates elevated or tighten monetary policy further, increasing borrowing costs for governments and businesses worldwide.
Developing economies, especially those yet to recover fully from the COVID-19 pandemic, face the greatest risks. Gill warned that countries already burdened with high debt could see spending on education, healthcare, and other essential public services squeezed as debt servicing costs rise.
“My own sense is that we may be just a few months away from seeing these pressures intensify,” Gill told Reuters, noting that the impact could become more severe once central banks begin raising policy rates in response to higher inflation.
The World Bank’s June assessment showed that 32 low- and middle-income countries are either already in debt distress or at high risk of falling into it. Gill cautioned that this number could rise rapidly if global interest rates increase further.
According to World Bank data, the average debt-to-GDP ratio for emerging market and developing economies stood at 74 per cent in 2025, significantly higher than the 50-55 per cent levels seen before the pandemic. For low-income countries, the ratio has risen to 67 per cent, compared with around 40 per cent before Covid-19.
Gill said some nations may ultimately require case-by-case debt forgiveness, while acknowledging that the G20 has made gradual progress in improving global debt restructuring mechanisms.
Despite the risks, Gill said artificial intelligence presents a significant opportunity for developing countries. A new World Bank analysis suggests only around 10 per cent of workers in poorer economies are likely to face adverse effects from AI, compared with 30-40 per cent in advanced economies.
He said AI could eventually help boost productivity and support long-term economic growth in developing nations, although the full benefits are unlikely to materialise within this decade.
