World Bank warns US-Iran conflict could cut global growth to 1.3%

The World Bank warned that further escalation of the US-Iran conflict could push global economic growth to 1.3% this year, as higher inflation and interest rates compound the drag from an already fragile global economy.

"The conflict has already disrupted energy markets and supply chains, and further escalation would push up inflation and interest rates, reducing global economic growth to 1.3% for this year," Indermit Gill, the World Bank's senior vice president and chief economist, said in an interview on July 22.

Brent crude settled at $91.63 a barrel on Tuesday, up 25% from pre-conflict levels on Feb. 27, after the US completed its 10th consecutive night of strikes targeting Iranian command centers, missile sites and air defenses. Persian Gulf flows have collapsed to below 45% of pre-war levels, with the Strait of Hormuz — which handles about 21% of global oil trade — near a standstill. Gold rose 1.7% to $4,079 an ounce as investors sought safe havens, while copper gained 3% to $6.56 a pound on supply concerns.

The 1.3% forecast would mark the slowest global expansion since the pandemic-era contraction of 2020, excluding the brief recovery year of 2021. The World Bank's previous baseline projection, published in January, had global growth at 2.7% for 2026. The downgrade of 1.4 percentage points reflects the compounding effect of higher energy costs, tighter financial conditions and disrupted trade routes across the Middle East.

The Houthis have declared a maritime embargo on Saudi Arabia, putting roughly 2.5 million barrels a day of Saudi oil at risk via the Red Sea — one of the few remaining routes able to offset lost Hormuz volumes. US intelligence assesses that further strikes are unlikely to soften Tehran's stance, while Israel believes Iran has moved enrichment centrifuges into the deeply buried Pickaxe Mountain site, raising the prospect of a prolonged conflict.

The last time a major Middle East conflict disrupted global oil supplies at this scale was the 1990 Iraqi invasion of Kuwait, when Brent crude doubled to $40 a barrel and global growth slowed to 1.5% from 3.3% the prior year, according to World Bank data. The current conflict carries additional risks through the Strait of Hormuz, which alone handles about 21% of global oil consumption, compared with about 4% that passed through the Strait of Malacca during the 1990 crisis.

Asia's oil buyers face crude costs above $100 a barrel if the Houthi blockade escalates, according to analysts cited in recent reports. The US has also imposed a 50% tariff on a range of Canadian goods and is preparing Section 301 tariffs on dozens of countries, adding a trade-policy layer to the economic headwinds. The Pentagon has reported $37.5 billion in direct war costs so far, with two US service members killed in Jordan and Iraq in recent days.

The World Bank's warning underscores a transmission chain that runs from battlefield escalation to energy prices to inflation expectations to central bank policy. If Brent holds above $90, the Fed and other major central banks would face pressure to keep rates higher for longer, further squeezing growth in emerging markets that are already grappling with elevated debt service costs.

This article is for informational purposes only and does not constitute investment advice.