Middle East crisis hits global growth and lifts inflation: UN

NEW YORK: The crisis in the Middle East has delivered a fresh shock to the global economy, slowing growth, pushing up inflation and increasing uncertainty, the United Nations warned in a mid‑2026 economic outlook released on Tuesday.

The World Economic Situation and Prospects report projects global GDP growth of 2.5% in 2026, down 0.2 percentage points from the January forecast and well below pre‑pandemic norms. A modest recovery to 2.8% is expected in 2027. The report says solid labour markets, resilient consumer demand and AI‑driven investment in some economies provide partial support, but the outlook has weakened further.

The immediate impact has been concentrated in the energy sector, where constrained supply and surging prices have raised freight and insurance costs and pushed up production expenses across supply chains. While energy firms are seeing windfall gains, households and businesses face higher costs, and the overall outlook depends heavily on how long disruptions persist.

Inflation, which had been easing since 2023, is now projected to rise. In developed economies, inflation is forecast to increase from 2.6% in 2025 to 2.9% in 2026. The rise is sharper in developing economies, where inflation is expected to climb from 4.2% to 5.2% as higher energy, transport and import costs erode real incomes and broaden price pressures.

Food prices are a particular concern. Disruptions to fertiliser supplies have pushed up costs and could reduce crop yields, adding upward pressure on food prices, the report warns.

Central banks face a difficult trade‑off: raising interest rates to curb inflation risks further slowing growth, while holding rates steady could allow price pressures to become entrenched. Global financial markets have so far absorbed the initial shock in an orderly fashion, but higher energy prices have lifted inflation expectations and driven short‑term bond yields higher, tightening external financing conditions for developing countries.

“The Middle East crisis has intensified strains across developing economies,” said Li Junhua, United Nations Under‑Secretary‑General for Economic and Social Affairs. “Rising borrowing costs and renewed capital‑flow pressures risk deepening debt vulnerabilities and constraining the resources available for sustainable development at a critical moment.”

The report highlights uneven regional impacts. Western Asia faces the most severe damage, with growth projected to fall from 3.6% in 2025 to 1.4% in 2026 because of energy shocks, infrastructure damage and disruptions to oil production, trade and tourism. The United States is expected to remain comparatively resilient, with growth of about 2.0% in 2026, supported by household demand and investment in advanced technologies. The European Union’s growth is forecast to slow from 1.5% to 1.1%, while the United Kingdom is expected to moderate from 1.4% to 0.7%.

In Asia, China’s diversified energy mix and policy support are providing a buffer, with growth seen easing from 5.0% in 2025 to 4.6% in 2026. India is projected to expand by 6.4%, down from 7.5% in 2025. Africa’s average growth is forecast to dip slightly from 4.2% to 3.9%, masking a split between oil and gas exporters, which benefit from higher prices, and net energy importers, which face rising fiscal pressures. Latin America and the Caribbean are expected to remain on a low‑growth path, with growth slowing from 2.5% to 2.3%.

The UN cautions that the downgraded outlook understates the full scale of the setback to development. Price shocks are eroding food security, real incomes and productive investment, raising the risk of lasting social and economic damage. Low‑income households are bearing the heaviest burden as food and energy costs take up a larger share of spending, and wages lag behind rising prices. At the same time, aid flows are falling and rising debt‑service costs are crowding out spending on health, education and social protection.

The report warns that persistently high energy prices could prompt a short‑term return to carbon‑intensive fuels even as they strengthen the long‑term case for accelerating the shift away from fossil fuels. It calls for sustained multilateral action, including keeping trade open, expanding concessional finance and supporting structural transformation. The Sevilla Commitment, agreed at the Fourth International Conference on Financing for Development, is cited as a framework to scale up finance, address debt challenges and support vulnerable countries.