World Bank Warns Wider Iran War Could Slash Global Growth to 1.3% in 2026

The World Bank warned that a prolonged military conflict involving Iran could push the global economy into one of its weakest periods of growth in decades, with global expansion potentially slowing to 1.3% in 2026 if hostilities persist for six months or longer.

Speaking to Reuters, World Bank Chief Economist Indermit Gill said the institution's June economic outlook outlined three possible scenarios for a conflict in the Middle East, adding that recent developments suggest the most severe scenario is becoming increasingly plausible.

Under that downside scenario, global growth would fall sharply from an estimated 2.9% in 2025 to 1.3% in 2026, while worldwide inflation could accelerate to 4.5%, forcing interest rates to remain elevated and placing additional pressure on economic activity.

Gill said an extended conflict that damages the region's energy infrastructure could disrupt global oil supplies while also interrupting the trade of critical agricultural inputs, including fertilizers, helium, and sulfur. Such disruptions would raise food production costs and increase the risk of food insecurity across many parts of the world.

The warning comes as military tensions continue to escalate across the Middle East, with attacks reported inside Iran, renewed disruptions to shipping through the Strait of Hormuz, and the Houthis announcing a maritime blockade targeting Saudi shipments passing through the Bab el-Mandeb Strait, intensifying concerns over the security of global energy supplies.

According to Gill, low- and middle-income countries would bear the heaviest economic burden, particularly those still struggling to recover from the effects of the COVID-19 pandemic.

Higher global interest rates would significantly increase borrowing costs, making it more difficult for governments to finance essential sectors such as healthcare, education, and infrastructure. He also warned that heavily indebted countries could face mounting difficulties servicing their debt obligations if financing conditions continue to tighten.

World Bank data show that 40% of low- and middle-income economies, equivalent to 32 countries, are already either in debt distress or at high risk of falling into it, with the number expected to rise if inflationary pressures and elevated interest rates persist.

Average public debt across emerging and developing economies climbed to 74% of GDP in 2025, up from roughly 50%–55% before the pandemic, while debt in low-income countries reached 67% of GDP, compared with about 40% before COVID-19.

Gill said debt relief may become necessary for certain countries on a case-by-case basis to prevent deeper financial crises.

The World Bank economist noted that major economies, including the United States, China, and India, are expected to withstand the economic fallout more effectively thanks to their diversified economic structures and stronger domestic resilience.

He acknowledged that the G20 has made progress in improving sovereign debt restructuring mechanisms, but said implementation remains too slow relative to the pace at which financial risks are increasing.

Despite the near-term challenges, Gill said artificial intelligence could become a meaningful driver of productivity growth for developing economies over the longer term.

He estimated that only about 10% of workers in low-income countries are likely to face negative employment effects from AI, compared with 30% to 40% in advanced economies. While widespread productivity gains are unlikely to materialize during the current decade, he said broader adoption of AI technologies could eventually support stronger long-term economic growth in developing nations.