Theme of the Day: Middle East Conflict Sends Global Growth to Lowest Rate Since COVID-19 – World Bank

The global economy is facing another major shock. The conflict in the Middle East has triggered sharp increases in energy prices, renewed inflationary pressures, and fuelled expectations of tighter monetary policy. Barring a miracle, the 2020s will prove to be what their ominous opening foreshadowed: a lost decade—not just for a couple of outliers, but for dozens of developing economies. The conflict in the Middle East is expected to slow global growth to the lowest rate since the onset of the COVID-19 pandemic amid higher energy prices, steeper inflation, and increased borrowing costs, according to the World Bank Group's latest Global Economic Prospects report. Global growth is forecast to slow to 2.5% in 2026, down from 2.9% in 2025. Forecasts for two-thirds of economies have been downgraded relative to Jan of this year. Global growth is expected to improve to 2.8% in 2027 as energy supplies recover, monetary easing resumes, and trade strengthens, but will remain 0.4 percentage points below the average during the 2010s. Weak growth in developing economies has stalled progress toward advanced-economy income levels. By 2028, developing economies other than China and India will have collectively experienced nearly a decade of no progress on narrowing their per capita income gap with advanced economies, the report finds. According to the report, the closure of the Strait of Hormuz has severely disrupted energy markets, with Brent crude oil prices projected to average $94/bbl in 2026, 36% above 2025 levels, assuming the worst disruptions abate in Jul. Yet downside risks are significant. If energy supply disruptions prove more severe than currently assumed and are accompanied by substantial financial stress, global growth could fall to just 1.3% in 2026, and inflation would rise to 4.4%. Persistent trade policy uncertainty, geopolitical strains, and weather-related shocks also pose material risks. On the upside, broader investment in and adoption of artificial intelligence (AI) could lift activity. In the longer term, higher productivity related to effective AI adoption could raise trend global growth, including through the adoption of small AI solutions in EMDEs. The impact of artificial intelligence (AI) on economic growth has become one of the central economic debates of our time. At stake is not only the future trajectory of growth, but also outcomes for labour and product markets and income distribution within and across countries. The debate about the economic effects of AI comes at a time when potential growth — the maximum sustainable rate of expansion without generating inflationary pressures — has been slowing for more than two decades. If the trends of the past two decades persist, global potential growth is expected to fall to a three-decade low in the 2020s. It has already declined from 3.6% per year in the 2000s to 2.8% in the 2010s and is projected to fall further to about 2.2% this decade. AI could offer a path to reversing the prolonged slowdown in global growth, but only if productivity gains are large, persistent, and widely diffused. At this pivotal moment, policy and investment choices will determine whether it becomes a broad-based driver of growth or a narrowly concentrated efficiency tool. Capitalizing on AI's potential will require careful policy choices and planning—including those around innovation, regulation, data privacy, and digital infrastructure—that evolve with technological advances and shape the employment effects of structural change. If AI becomes a transformative general-purpose technology, historical experience suggests that its broader economic effects are likely to unfold gradually, and projections of AI-driven growth should therefore be interpreted with caution.