The World Bank has warned that escalating tensions between Iran and Israel pose a serious threat to economic stability across the GCC region, potentially derailing growth prospects and intensifying global uncertainty. While the immediate economic impact of the conflict remains difficult to quantify, the bank cautions that the fallout could ripple far beyond energy markets, affecting trade, inflation, investor sentiment, and fiscal stability.
Safaa El Tayeb El-Kogali, the World Bank’s regional director for the GCC, highlighted the risks during the release of the Bank’s latest Gulf Economic Update. She noted that the region remains particularly vulnerable to geopolitical shocks, given its centrality to global oil markets and shipping routes. “Any conflict, especially in this region, can have long-lasting and adverse effects,” she said, pointing to rising shipping costs, increased inflationary pressures, and mounting investor caution as potential consequences.
“The conflict between Iran and Israel is injecting a new layer of uncertainty into the global economy,” said El-Kogali. “In such volatile conditions, investors tend to adopt a wait-and-see approach, delaying decisions until clarity and stability return.”
Even as the region braces for potential external shocks, the World Bank acknowledged the GCC’s economic resilience, largely credited to sustained diversification efforts. In 2024, the region’s overall GDP grew by 1.8 per cent, a notable improvement from 0.3 per cent in 2023. This recovery was driven by a robust 3.7 per cent expansion in non-oil sectors, which helped offset a 3 per cent contraction in oil output due to Opec+ production cuts.
Looking ahead, the Bank projects regional growth will rebound to 3.2 per cent in 2025 and accelerate to 4.5 per cent by 2026, supported by the gradual easing of oil production curbs and continued momentum in non-oil industries. The UAE is forecast to be among the strongest performers, with growth reaching 4.6 per cent in 2025 and stabilising at 4.9 per cent through 2027. This is expected to be fuelled by targeted public investments, improvements in governance, and expanding international partnerships, along with the normalisation of oil production levels.
However, the outlook remains highly contingent on geopolitical developments and the broader global economic environment. “Global trade uncertainty, weaker demand from key trading partners, and sustained volatility in oil markets could undermine growth projections,” El-Kogali warned. She urged policymakers to accelerate structural reforms, deepen intra-regional trade, and reduce dependency on hydrocarbons to build greater economic resilience.
The World Bank’s report, Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC, stresses the need for smarter fiscal management amid persistent oil price fluctuations and growing expenditure pressures. Some Gulf economies are projected to face widening fiscal deficits in 2025, highlighting the urgency of reforming government finances. The report finds that fiscal policy has played a stabilising role during economic downturns, with a one-unit increase in public spending boosting non-oil GDP by up to 0.45 units.
Nonetheless, the impact of public investment on long-term productivity and potential output remains limited. The Bank estimates that a one-time increase of one percentage point in government investment yields only a 0.07 per cent rise in non-oil potential output, indicating a need to reassess how fiscal resources are allocated.
To address short- and long-term risks, El-Kogali recommended a multi-pronged approach involving fiscal diversification, tax reform, and stronger regional trade integration. “Sustaining growth will depend on our ability to reduce exposure to fossil fuels, create high-quality jobs for youth, and stimulate innovation and entrepreneurship,” she said. She also pointed to the need for inclusive growth policies that support domestic consumption, bolster exports, and attract stable investment.
With the spectre of conflict looming large and global economic headwinds gathering, the World Bank’s message to GCC economies is clear: the time to fast-track reform is now, before volatility undermines years of hard-won progress.
Dr Issac PJ
drissacpj@gulfnewsweek.com