War’s Economic Toll

By Hakeema Intelligence · 2026-10-25 · Hakeema, The Majlis

The IMF sees a 1.3% regional contraction in 2026, with Gulf economies facing divergent risks from energy, trade and confidence shocks.

A Sharp Regional Shock

The International Monetary Fund has warned that a prolonged Middle East conflict could push the economies of the Middle East, North Africa and Pakistan into a deep contraction. Its latest forecast projects regional output to shrink by 1.3% in 2026, after expanding by 3.3% in 2025. A strong rebound of 6.6% is expected in 2027, but only if the conflict eases, energy production recovers and trade routes gradually reopen.[6]

The downgrade reflects damage across several channels. Energy production has been disrupted, shipping costs have increased, air traffic through the Gulf has been affected and tourism and investor confidence have weakened. The IMF has emphasized that the shock is highly uneven, with countries directly exposed to the conflict facing the sharpest losses.[1][4]

Gulf Economies Face Diverging Outcomes

The Gulf is not a single economic story. Exporters with direct exposure to disrupted energy infrastructure and shipping routes are bearing the greatest pressure. The IMF expects several economies to record double-digit contractions in 2026, including Bahrain, Kuwait and Qatar, while Iraq is also expected to suffer a severe decline. Saudi Arabia and the United Arab Emirates, despite being comparatively less affected by energy trade disruptions, are now projected to enter recession.[4]

The divergence reflects differences in infrastructure exposure, hydrocarbon concentration, fiscal buffers and the ability to redirect trade. Qatar and Kuwait remain particularly sensitive to energy production interruptions and regional logistics. Bahrain faces additional vulnerability because of its smaller economic base and more limited fiscal flexibility. Iraq combines oil dependence with security and infrastructure risks.

Saudi Arabia and the UAE have stronger sovereign balance sheets, more diversified non-oil sectors and greater capacity to support domestic demand. However, their resilience is not unlimited. Lower production, weaker investment sentiment, higher insurance costs and reduced travel activity can still affect construction, logistics, aviation, tourism and financial services.

Energy, Inflation and Trade Risks

The Strait of Hormuz remains central to the outlook. Any extended closure or disruption would threaten a major artery for global oil and gas shipments. The IMF’s global scenarios illustrate the scale of the risk. Its reference case assumes a 19% increase in energy commodity prices in 2026, with global growth at 3.1%. Under an adverse scenario, global growth falls to 2.5% and inflation rises to 5.4%. A severe scenario involving prolonged energy disruptions would reduce global growth to about 2%.[7]

For oil exporters, higher prices may partially offset lower volumes, but only if production and export infrastructure remain operational. For importers, the impact is more damaging. Egypt, Jordan, Morocco, Tunisia and Lebanon could face higher fuel and food bills, wider current-account deficits and renewed pressure on foreign-exchange reserves.

Remittances, tourism and government support have helped cushion oil-importing economies so far. The IMF nevertheless cautions that policy buffers are narrowing.[1] Higher interest rates, weaker currencies and elevated public debt could limit governments’ ability to respond if the conflict persists.

Market and Investment Implications

Financial markets are likely to price duration rather than simply the existence of conflict. A short disruption could produce a temporary risk premium, while prolonged damage to energy infrastructure would create a broader repricing of sovereign risk, corporate credit and regional equities.

Gulf equity markets may experience greater volatility in sectors linked to transport, tourism, banking and real estate. Banks face risks from slower credit growth, weaker collateral values and pressure on borrowers in construction and trade. Airlines, ports and hospitality companies are also exposed to lower passenger flows and higher operating costs.

At the same time, energy producers, defense-related industries and selected logistics operators could benefit from higher prices or increased demand. Investors should distinguish between headline oil exposure and actual free cash flow. Higher crude prices do not automatically translate into stronger earnings when production is constrained or infrastructure is impaired.

Sovereign wealth funds and large government-related entities remain important stabilizing forces in the GCC. Their investment capacity can support domestic projects and reduce the risk of disorderly fiscal adjustment. Yet markets will increasingly differentiate between countries with ample reserves and those requiring sustained external financing.

What Comes Next

The IMF’s projected 2027 rebound should not be interpreted as a return to the previous trajectory. Even if production normalizes, output in affected economies is expected to remain below earlier medium-term projections.[6] Lost investment, damaged infrastructure, displaced workers and weaker confidence can reduce potential growth long after headlines fade.

The most important indicators will be the duration of shipping disruption, the speed of energy-production repairs, oil and gas export volumes, tourism arrivals and sovereign credit spreads. A de-escalation could unlock a rapid inventory and investment recovery. Conversely, renewed attacks on critical infrastructure could transform a regional shock into a global inflation and growth problem.

For policymakers, the priority is preserving liquidity, protecting essential imports and maintaining credible fiscal frameworks. For investors, diversification across Gulf markets, careful analysis of sovereign buffers and preference for companies with low leverage and recurring cash flow are likely to matter more than broad regional exposure.

Key Takeaways

• The IMF forecasts a 1.3% contraction across the MENA, Afghanistan and Pakistan region in 2026, followed by 6.6% growth in 2027 if conflict and trade disruptions ease.[6]
• Gulf economies face sharply different outcomes, with several smaller or directly exposed exporters vulnerable to double-digit declines.[4]
• Energy, shipping, tourism, inflation and investor confidence are the main transmission channels from conflict to economic activity.
• Investment opportunities remain in resilient sovereign-backed economies and selected energy and logistics companies, but duration risk and fiscal differentiation are critical.

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Sources: 1. Source 2. Source 3. Source 4. Source 5. Source 6. Source 7. Source 8. Source 9. Source 10. Source