IMF downgrades Middle East and Central Asia outlook as war fallout and Hormuz disruption hit growth

The International Monetary Fund has sharply downgraded its outlook for the Middle East and Central Asia, saying the region's economy is now set to contract in 2026. The revision comes amid the fallout from the US-Israel war on Iran and prolonged disruption to shipping in the Strait of Hormuz. The IMF said the region's gross domestic product is forecast to shrink by 0.3% this year, reversing an April projection of 1.9% growth.

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The fund said the shipping disruption in the Strait of Hormuz was a key factor behind the weaker forecast. The waterway is a major route for global energy flows and, in peacetime, carries about one-fifth of the world's oil supplies. The IMF's latest outlook, published on Tuesday, said Kuwait, Iraq and Qatar are expected to suffer the steepest declines, with GDP forecast to fall by 16.7%, 16% and 15.6% respectively.

Bahrain is projected to contract by 11.3%, while Iran's economy is expected to shrink by 7.6%. Saudi Arabia is also forecast to record negative growth of 3.3%, although the IMF said it has partly offset pressure on its energy sector by increasing oil exports through the East-West pipeline. Kyrgyzstan is the only economy in the region singled out for strong growth, with GDP projected to expand by 9%.

The IMF said the Middle East and Central Asia is the only region likely to experience negative growth in 2026, underlining the scale of the shock. The downgrade matters because it links a regional military conflict to a broader economic slowdown across energy-producing states and trade routes. Countries around the Gulf depend heavily on stable shipping lanes, oil exports and investor confidence, so prolonged disruption can quickly feed into public finances and growth forecasts.

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The IMF's assessment also suggests the impact is not limited to Iran, but is spreading across neighbouring economies with deep exposure to energy markets and maritime trade. The fund said the global economy has so far proved resilient this year, but warned that multiple risks remain. It cited further escalation in conflicts, renewed trade tensions and fiscal vulnerabilities as factors that could weaken growth.

The outlook also comes as the IMF compares regional performance with stronger projections elsewhere, including growth of 5.1% for emerging and developing Asia and 3.1% for global GDP overall. What remains unclear is how long the shipping disruption in the Strait of Hormuz will last and whether the conflict will intensify further. The IMF's forecast is based on current conditions, so any change in the security situation could alter the outlook again.

For now, the downgrade points to a widening economic cost from the war and a difficult year ahead for several Gulf economies.

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