Arab News Japan

TOKYO: A prolonged war in the Middle East will see world GDP growth drop by nearly half, global inflation rise to 7.7 percent and recessions in the United States and most advanced economies, according to a report by analyst Oxford Economics (OE).

OE’s envisaged scenario assumes oil prices of over $150 per barrel for four months, alongside shortages of refined energy products.

World GDP growth would drop from 2.6 percent to 1.4 percent in 2026 before recovering to 2.1 percent in 2027. 

“While less severe than the pandemic or global financial crisis, the hit to growth would represent a larger, more coordinated slump than any other global downturn of the past 40 years,” OE says.

The impact of the cuts to energy supply alone would decrease world GDP by approximately 0.9 percentage points, while damage to supply chains and financial markets would cause a larger overall deviation of GDP.

OE warns the actual impact could be more acute. Physical fuel shortages may cause larger losses than assumed, more sustained supply chain stress and higher inflation, as well as the possibility of a permanent rise in long-term borrowing costs, altering how monetary policy responds to future shocks.

OE’s model assumes transit in the Strait of Hormuz resumes in May at around half of pre-conflict levels, with trade disruption easing slowly through the rest of 2026.

However, if the conflict is more drawn out and the Strait of Hormuz is closed for six months, Iran could target alternative oil shipping routes such as the pipeline to western Saudi Arabia and shipping in the Red Sea. OE’s prolonged war scenario also assumes more extensive damage and a more prolonged loss of LNG exports. OE sees the price of Brent oil rising towards the $200 mark.

The impact on jet fuel is already significant and shipping fuel costs have reportedly already doubled in price due to the conflict. Further rises in freight shipping costs could make it uneconomic to ship some low value-added products, while physical shortages of shipping fuel might leave some cargoes stranded, resulting in greater supply chain disruption.

OE says the closure of the Strait could also affect agricultural output and may lead to shortages of various other industrial inputs, such as aluminum, sulfur (a key input for some fertilizers and batteries), naphtha (used in a range of rubber, plastics and synthetic fibers), and helium (important for semiconductors). 

The Gulf Cooperation Council countries will be the worst-hit by a prolonged conflict in Iran, according to Oxford Economics, which predicts GCC GDP falling by over 8 percent in 2026. However, it sees growth rebounding as oil production and exports revive in the latter part of 2026 and into 2027, resulting in growth of over 9 percent next year.

Tourist traffic to the Middle East is seen falling by 50 percent from previous estimates, while Asian inbound flows dip by nearly 5 percent.