The reopening of the Strait of Hormuz under the latest US-Iran ceasefire agreement may have removed one of the biggest threats to global energy markets. Still, economists warn that Gulf economies are unlikely to stage a rapid recovery, as lingering investor caution, disrupted trade flows, and weaker oil revenues continue to weigh on growth.
Oxford Economics has sharply downgraded its outlook for the GCC, projecting the region’s aggregate real GDP to contract by 2.4 per cent in 2026, compared with an earlier forecast of a 1.2 per cent decline.
The downgrade reflects the deeper-than-expected impact of months of conflict-related disruptions that curtailed oil exports, disrupted shipping routes and delayed investment decisions across the region.
Azad Zangana, head of GCC Macro at Oxford Economics, said new production and trade data indicate that economic activity has fallen more sharply than previously anticipated, while export recovery remains weaker than expected despite the ceasefire agreement.
“Shipping data suggest the recovery in exports has been lacklustre since the first ceasefire deal was announced. We continue to assume a peace agreement will be reached in the coming months, but we have pushed back the recovery in shipping flows to the start of next year,” Zangana said.
The Strait of Hormuz, through which roughly one-fifth of global oil consumption and nearly a quarter of the world’s liquefied natural gas trade passes, remains central to the region’s economic fortunes. Although the latest agreement provides for the reopening of the strategic waterway, Oxford Economics expects shipping activity to recover only gradually.
Initially, vessel traffic is expected to surge as tankers and cargo ships stranded during the conflict leave the Gulf. However, shipping volumes are likely to slow thereafter as traders, insurers and shipping companies assess whether the ceasefire can hold.
Recent vessel-tracking data from major maritime intelligence providers show that tanker movements through the Strait of Hormuz remain well below pre-conflict levels despite the reopening announcement. Insurance premiums for vessels operating in Gulf waters also remain elevated, reflecting continued geopolitical uncertainty.
The cautious recovery outlook is echoed by other international institutions. The International Monetary Fund had already revised GCC growth lower earlier this year, warning that prolonged trade disruptions and reduced hydrocarbon exports could undermine fiscal balances across the region. The World Bank has similarly highlighted geopolitical risks as a key downside factor for economic growth in the Middle East.
The impact extends beyond oil.
Oxford Economics has lowered its forecast for GCC non-oil GDP growth to a contraction of 1.1 per cent this year, reflecting weaker business sentiment and delays in capital expenditure.
Across the region, governments and private-sector firms have become more selective in approving new projects, while foreign investors are demanding higher returns to compensate for elevated geopolitical risk. Economists say that even with a lasting peace agreement, confidence may take months to rebuild.
“The air of caution remains, especially regarding capital expenditure,” Zangana noted. “A more cautious approach, coupled with higher risk premiums demanded by investors, is likely to lead to slower growth in the next few years.”
The economic challenges come as oil prices retreat sharply from wartime highs.
Brent crude has fallen about 10 per cent since news emerged of the latest ceasefire agreement, reflecting expectations that Middle Eastern oil supplies will gradually return to global markets. Prices, which briefly surged above $100 a barrel during the height of the conflict, have eased as fears of a prolonged supply disruption receded.
Oxford Economics now expects lower oil prices to further constrain government revenues across the Gulf, particularly for countries that remain dependent on hydrocarbon exports to finance spending programmes.
The view aligns with recent assessments from the International Energy Agency and Fitch Ratings. The IEA recently warned that a durable peace agreement could ultimately create a significant oil surplus in 2027 as Gulf production recovers and previously constrained exports return to the market. Fitch has also forecast that global oil markets could swing back into oversupply later this year once production normalises and shipping bottlenecks ease.
For GCC governments, the challenge will be balancing slower revenue growth with ambitious diversification agendas aimed at reducing dependence on oil. Major projects linked to Saudi Arabia’s Vision 2030, the UAE’s industrial strategy and wider Gulf infrastructure programmes are expected to continue, but analysts believe spending priorities could become more selective if energy revenues remain under pressure.
While the ceasefire has reduced the immediate threat to global energy supplies, economists caution that the region’s recovery will depend less on the reopening of the Strait of Hormuz and more on whether a lasting political settlement can restore investor confidence, revive trade flows, and encourage businesses to resume long-term investment plans.
For now, the Gulf appears to have stepped back from crisis, but a return to pre-conflict growth levels remains some distance away.
