IMF sharply lowers 2026 growth forecasts for Gulf states as Strait of Hormuz remains closed

IMF cuts Gulf growth forecasts

The International Monetary Fund has sharply reduced its 2026 economic growth estimates for Gulf nations, citing the extended closure of the Strait of Hormuz, and has also delayed its prediction for when the waterway will reopen.

In its latest World Economic Outlook, released on Tuesday, the fund also lowered its projections for the broader Middle East and North Africa region, which it now expects to contract by 2 per cent this year — a downward revision of 3.1 percentage points from its April forecasts. The MENA region is the only one projected to record an economic contraction in 2026.

Globally, the IMF kept its 2026 growth forecast unchanged at 3.1 per cent and raised its 2027 projection to 3.4 per cent.

“This is the net result of two main forces that are shaping the outlook,” IMF chief economist Silvana Tenreyro told reporters, referring to the negative supply shock from the Iran war and the positive demand shock from the AI infrastructure boom.

The fund said the global economy has so far been able to withstand the impact of the Iran war energy shock thanks to a combination of factors, including supply adjustments, a drawdown of inventories, lower energy intensity, and adaptation by households and companies to higher prices.

The latest forecasts come as Saudi Arabia has vowed to continue bringing its oil supplies to market despite escalating attacks in recent days by Iran-backed Houthi rebels.

The number of vessels transiting the Strait of Hormuz has declined in recent days after tanker attacks reached their highest weekly count this year on 9 October. One tanker crossed the waterway on Saturday, down from eight the day before, according to data from analytics firm Kpler.

Confirmed total Hormuz clearance stands at roughly 11.9 million barrels per day, about 30 per cent below its pre-war baseline, Kpler data showed, although daily readings have swung wildly.

Energy supply disruptions from the Iran war are the latest in a series of shocks the global economy has weathered in recent years, including the 2025 tariffs row, Russia’s 2022 invasion of Ukraine, the Covid-19 pandemic and the subsequent global tightening cycle.

“The economy has been resilient, but that resilience is reaching its limits,” Ms Tenreyro said. “The task ahead is to move from coping to rebuilding, restoring fiscal space and rebuilding supply-side resilience.”

Global outlook and regional disparities

The IMF said the economic outlook is highly uneven across countries, reflecting differences in their exposure to commodities, AI-related activity and borrowing costs.

Overall GDP growth in the US is forecast at 2.3 per cent, compared with 1.1 per cent for the euro area, 1.3 per cent for the UK, 0.7 per cent in Japan and 1.1 per cent in Canada.

Growth in China, classified as an emerging economy, is forecast to slow to 4.5 per cent in 2026, compared with 7 per cent for India and 3.6 per cent for Pakistan.

For the Gulf, the IMF projects the UAE economy to contract by 3.9 per cent this year before rebounding at a 7.7 per cent growth rate in 2027, conditional on the normalisation of shipping routes and the reopening of the Strait of Hormuz.

The new projections for the Arab world’s second-largest economy reflect a downgrade of 7 percentage points for 2026 and an upgrade of 2.4 percentage points for 2027 compared with the fund’s April forecast.

Bahrain, Kuwait and Qatar are forecast to see double-digit contractions of 11.3, 16.7 and 15.6 per cent, respectively, in 2026.

The fund also lowered its forecasts for Saudi Arabia, but expects the decline to be less sharp compared with Bahrain, Kuwait and Qatar because of its diversified export routes. Saudi Arabia is expected to slow from a positive growth rate of 4.6 per cent last year to a 3.3 per cent contraction this year.

Oman is the only GCC member to see positive economic growth in 2026, at 4.1 per cent.

The latest forecast assumes the gradual reopening of the Strait of Hormuz will resume in March 2027, with a return to prewar conditions by October. It also notes that uncertainty is assumed to remain elevated throughout next year.

Under these conditions, oil exporters are expected to see economic activity rebound next year, similar to the UAE. Overall GDP growth in Bahrain, Kuwait and Qatar would expand by 13.9, 17.1 and 18.8 per cent, respectively, the fund said. Saudi Arabia’s economic activity would accelerate at a 7.9 per cent pace. The kingdom’s ministry of finance last week said its economy was forecast to grow by 12.8 per cent next year.

Other oil exporters also faced downgrades for 2026, including Iraq at minus 16 per cent and Iran at minus 7.6 per cent, with the latter also impacted by enhanced sanctions and a US naval blockade.

Meanwhile, the fund said importers in the region were expected to remain relatively resilient. Egypt’s economy is forecast to expand by a 5.1 per cent pace in 2026, more than 8 percentage points lower than the IMF’s April forecast. Morocco’s economy is set to grow by 4.5 per cent and Jordan’s by 2.7 per cent. The fund did not submit projections for Lebanon.

Inflation and bond market pressures

The fund said that while the Iran war and AI buildout were driving growth in opposite directions, both were adding to inflationary pressures.

Global headline inflation is set to increase to 4.7 per cent in 2026 before easing to 4.1 per cent in 2027, a cumulative upward projection of 0.7 percentage points.

Ms Tenreyro said this was driving up borrowing costs in advanced economies at a time when public debt was already high. The US Federal Reserve and other central banks in advanced economies have already begun raising interest rates or are expected to do so this quarter.

“This interaction of high debt and high financing costs, in turn, has heightened fiscal concerns and risks,” Ms Tenreyro said.

Global bonds have been under significant pressure in recent weeks over fears of higher energy prices, higher-for-longer interest rates and concerns over unchecked government spending.

The yield on the 10-year US Treasury, a benchmark for global borrowing costs, has recently traded at its highest level since 2002. Bonds in Japan, France, Germany and the UK have also recently hit multi-decade highs.

Pimco, a global investment management firm, warned last week that the yield on the 10-year Treasury could hit 6 per cent for the first time since 2000.