MIDDLE EAST - The economy of the Middle East, North Africa, Afghanistan, and Pakistan (MENAAP) is projected to contract by an average of 2.1% in 2026 as the conflict that began in February continues to disrupt energy exports, trade, tourism, aviation and logistics, according to the World Bank Group’s latest economic update.
The report, From Divide to Opportunity: AI, Jobs, and Growth, estimates that regional growth will fall sharply from 3.3% in 2025, with the closure of the Strait of Hormuz creating particularly heavy costs for oil-exporting Gulf economies.
Gulf Economies Face Heaviest Losses
The impact differs from previous energy shocks, which generally benefited oil exporters through higher energy revenues. This time, restrictions on oil exports through the Strait of Hormuz have reduced export volumes, putting pressure on both economic output and government revenues.
Gulf Cooperation Council (GCC) economies are projected to contract by an average of 4.3% in 2026, making them among the hardest-hit economies in the region.
Oil-importing countries, meanwhile, have remained comparatively resilient. Their economies are projected to grow by 4.3% in 2026, up from 3.9% in 2025.
Trade Disruptions Add to Inflation Pressures
The World Bank said the economic effects of the conflict extend beyond the energy sector. Disruptions to shipping and trade have affected tourism, aviation and logistics, while increased uncertainty has weakened financial markets and business sentiment.
Higher transportation and import costs are also contributing to renewed inflationary pressures across much of the region. Food prices are particularly affected as shipping disruptions place additional strain on supply chains.
The shock is compounding existing challenges in fragile and conflict-affected economies, where economic vulnerabilities and poverty remain concentrated. According to the report, MENAAP is the only region globally where poverty levels increased over the past decade, while poverty declined in other regions.
AI Offers Potential for Productivity Gains
Despite the economic deterioration, the report identifies artificial intelligence as a potential source of productivity gains. AI could improve the productivity of up to 20% of jobs across the region, creating opportunities to support growth even as economies face the effects of the current shock.
The report comes as governments and businesses across the region continue to explore AI adoption, skills development and digital transformation as potential drivers of economic growth.
Recovery Could Accelerate in 2027
The outlook could improve significantly if the conflict subsides by the end of 2026. Regional growth excluding Iran is projected to rebound to 7.8% in 2027, largely driven by the recovery of hydrocarbon production and exports.
However, the World Bank cautioned that a strong regional recovery is not guaranteed. Damage to infrastructure, delayed investment and depleted fiscal buffers could continue to constrain economic activity after the immediate effects of the conflict ease.
The pace of recovery will depend not only on the end of the conflict, but also on sustained policy efforts to restore investment, rebuild infrastructure and strengthen economic resilience.
For the region’s oil exporters, the disruption highlights the economic risks associated with dependence on energy exports and exposure to major trade routes. At the same time, the potential contribution of AI points to opportunities for productivity growth and economic diversification as MENAAP economies navigate the continuing fallout from the conflict.
