World Bank warns of prolonged economic strain from Iran war

Even if a ceasefire holds, the economic fallout from the Iran war is already rippling far beyond the region, World Bank President Ajay Banga told Reuters, sketching out a global economy that slows, heats up, and grows more fragile the longer the conflict lingers.

Two paths, one problem

The World Bank’s outlook hinges on two primary scenarios: A ceasefire baseline where global growth slows by 0.3-0.4 points, and a prolonged war that triggers a full 1.0-point contraction, Banga said. Inflation is projected to jump 200–300 basis points in a ceasefire scenario, with an additional 0.9-point spike if fighting continues.

The toll on emerging markets: The World Bank slashed 2026 growth forecasts for emerging markets and developing economies to 3.65% in 2026, down from 4% in October, with a downside scenario pulling it as low as 2.6%. Meanwhile, inflation projections have jumped to 4.9%, up from a 3% estimate, potentially climbing to 6.7% if the conflict persists.

Where the shock is coming from

Energy markets are leading the disruption, with oil prices surging by roughly 50%, while supply chains for gas, fertilizers, and even niche inputs like helium are under strain. Aviation and tourism — early casualties in any regional conflict — are also absorbing fresh blows.

The fate of the Strait of Hormuz is also adding pressure. The longer the strait remains closed, the deeper and more lasting the damage will be to critical energy infrastructure.

And the two-week truce appears increasingly tenuous. Exchanges between Israel and Iran, coupled with flopped peace talks, proved how quickly the situation could deteriorate — keeping markets on edge.

Crisis tools are being deployed

To support vulnerable economies, the bank is activating crisis-response channels to fast-track liquidity, particularly for energy-importing nations. These mechanisms allow countries to bypass new board approvals and tap into previously authorized but undisbursed funds. Despite these measures, high debt and currently high-interest rates leave little room for error in these economies.

What not to do: Banga cautions against broad energy subsidies, which could further destabilize already strained fiscal positions.

If there is a longer-term takeaway, it’s structural. The crisis is highlighting the need for energy diversification and self-sufficiency. The World Bank nodded to this shift by re-entering nuclear financing alongside continued support for renewables and hydro. Countries that invested early are already seeing the benefits — Nigeria leveraged its large-scale refining capacity to increase output and supply aviation fuel regionally, insulating itself from the worst of the shock, Banga said.

MARKETS THIS MORNING-

Asian markets opened lower on US blockade news. Hong Kong’s Hang Seng shed 1.2%, while Japan’s Nikkei declined 0.6% and the Shanghai Composite was down 0.3%. Wall Street futures are also in the red.

THE CLOSING BELL-

The DFM rose 0.4% on Friday on turnover of AED 784.2 mn. The index is down 5.5% YTD.

In the green: Dubai National Ins. & Reins. (+15.0%), Air Arabia (+4.8%), and Parkin (+3.9%).

In the red: Dubai Islamic Bank (-4.9%), Emirates REIT (CEIC) (-3.7%), and Dubai Electricity & Water Authority (-1.8%).

Over on the ADX, the index remained flat on turnover of AED 797.9 mn. Meanwhile, Nasdaq Dubai was up 0.1%.