World Bank cuts global growth outlook to 2.5%, warns of drop to 1.3% if war fallout spreads to markets

By Andrea Shalal

WASHINGTON, June 11 (Reuters) - The World Bank on Thursday cut its global growth forecast for 2026 to 2.5% due to the war in the Middle East, and said growth could slow to just 1.3% if energy supply disruptions prove more severe and come with substantial stress in financial markets.

Global growth reached 2.9% in 2025, the bank said in its semi-annual Global Economic Prospects, up 0.2 percentage point from its estimate in January. Its 2026 forecast is down 0.1 percentage point from January, the lowest seen since the COVID pandemic that began in late 2019.

The bank lowered forecasts for two-thirds of countries as a result of the war, with the biggest cuts affecting the United Arab Emirates, Iraq and other countries in the Middle East whose energy exports have been hit hard by the conflict.

The World Bank's stark outlook comes as the war launched by U.S. and Israeli strikes on Iran on February 28 drags into a fourth month. It has sent energy prices up sharply due to the closure of the Strait of Hormuz, renewed inflationary pressures worldwide and fueled expectations of tighter monetary policy across many countries. Fertilizer prices are also up sharply, raising concerns about a major food supply crisis.

Oil prices closed nearly $2 higher on Wednesday after U.S. President Donald Trump said the U.S. would attack Iran "very hard" if no peace deal was finalized, following one of the most significant exchanges of fire since an April ceasefire.

The World Bank said its baseline forecast assumed an average Brent crude oil price of $94 for the year, up 36% from 2025, and that the worst disruptions to energy supplies would abate by the end of July, with global headline inflation seen at 4%.

It said growth could slow to 2.1% if the energy disruptions lasted longer and oil prices averaged $115 per barrel this year, which could drive inflation to 4.4%. The outlook would worsen further, with growth decelerating to just 1.3%, if the energy shock affected financial markets, resulting in lower energy prices, greater volatility and weaker confidence, it said.

"These risk scenarios show how quickly the outlook could weaken if energy and financial pressure reinforce each other," Ayhan Kose, the World Bank's deputy chief economist, said. If the energy shock triggered a financial market shock, confidence could erode quickly, he said.

GROWTH IS LOWER THAN LAST DECADE

Global growth is expected to improve to 2.8% in 2027 and 2028, but that remains 0.4 percentage point below the average rates seen during the 2010s due to a slew of factors, including slower population growth, slower private investment growth, falling public investment, rising public debt and slower growth in trade, World Bank chief economist Indermit Gill said.

"The world economy is a lot less resilient today than it was in 2008 and even as compared with 2018," Gill told reporters, predicting the next years would be marked by high policy uncertainty, inflationary pressures and high interest rates.

Weak growth in developing economies has stalled progress toward advanced-economy income levels, with dozens of developing countries other than China and India looking at a "lost decade" in which they saw no progress on narrowing their per capita income gap with advanced economies, the report said.

Developing economies have been hit harder by the war, with the bank now projecting growth at a post-pandemic low of 3.6% this year, down from 4.4% in 2025, the bank said.

The bank maintained its forecast of 2.2% growth in the U.S. economy in 2026, but said that could taper off to 2.1% in 2027 and 2% in 2028. The euro area was expected to grow by 0.8% in 2026, down from 1.4% in 2025. Japan's GDP was forecast to grow 0.7% in 2026, down from 1.1% in 2025.

The World Bank forecast GDP growth of 4.2% in China in 2026, a downward revision of 0.2 percentage point, after 5% growth in 2025.

MIDDLE EAST COUNTRIES HIT HARDEST

It slashed its forecast for GDP growth in the Middle East, North Africa, Afghanistan and Pakistan by 2.7 percentage points to 1.6% in 2026, down from 4% in 2025, but said growth in the region could rebound to 5% in 2027.

The United Arab Emirates was expected to see growth of 2.4% in 2026, down sharply from the January forecast of 5% and the 2025 rate of 6.2%. The bank also lowered Turkey's 2026 GDP growth forecast by 0.9 percentage point to 2.8%.

The World Bank said India remained the fastest-growing large economy in the world, with its GDP seen growing by 6.6% in 2026, after growth of 7% in 2025. Growth rates in India were expected to remain fairly high for the next two decades, Gill said.

(Reporting by Andrea Shalal; Editing by Chris Reese)