Global economic growth is projected to slow to 2.5% this year, marking the weakest performance since the onset of the Covid-19 pandemic, according to the World Bank’s latest Global Economic Prospects report. The Washington-based institution attributes this downturn to the ongoing war in the Middle East, which has fueled rising inflation and borrowing costs. The bank has downgraded growth forecasts for two-thirds of all nations, warning that without a significant shift, the 2020s risk becoming a “lost decade” for many developing economies.
How does the conflict in the Middle East impact global inflation?
The disruption of oil flows through the Strait of Hormuz is the primary driver of projected inflationary pressure. Even if the immediate shipping crisis abates, the World Bank expects global inflation to climb to 4% in 2026, up from 3.3% in 2025. The conflict has also triggered a sharp rise in agricultural costs, with average fertilizer prices expected to increase by as much as 38% this year due to supply chain bottlenecks in the Gulf region.
The World Bank has committed to making up to $100 billion available over the next 15 months to assist countries most affected by the economic fallout of the conflict, according to World Bank President Ajay Banga.
What is the “lost decade” for developing countries?
Developing nations—excluding major economies like India and China—have struggled to narrow the wealth gap with advanced economies for ten consecutive years. World Bank data suggests that aggregate government debt in these regions has spiked from 40% of GDP in 2010 to 70% today. This high debt-to-GDP ratio limits the ability of governments to subsidize energy or food costs for their citizens during crises. Recent research from Development Finance International indicates that the G77 group of developing nations currently spends approximately $8 trillion annually on debt servicing, accounting for 35% of total government expenditure.
Can technology bridge the economic divide?
While the outlook remains grim, the World Bank’s chief economist, Indermit Gill, points to artificial intelligence, the clean energy transition, and increased regional trade as potential catalysts for future growth. However, he cautions that these benefits are currently skewed toward wealthier nations. Less than 25% of the world’s data centers are located in developing economies, and AI models often lack training data for languages spoken by half of the global population. Without intentional investment to close these gaps, the bank warns that the AI revolution could worsen global inequality rather than alleviate it.
Monitor sovereign debt levels and commodity price indices as primary indicators of economic stability in emerging markets. When debt-servicing costs exceed 30% of government revenue, fiscal space for infrastructure investment typically evaporates.
What are the risks of a worst-case scenario?
The World Bank warns that the current economic trajectory is “fragile.” In a downside scenario where hostilities escalate or commodity supply chains face prolonged closures, global growth could plummet to 1.3%. This would represent a significant contraction from current estimates. The Gulf economies are already bracing for a steep decline, with growth expected to fall from 4.5% last year to 1.3% in 2026, before a projected rebound once oil flows stabilize and reconstruction efforts begin.
Frequently Asked Questions
Why is fertilizer price volatility a global concern?
Fertilizer is a critical input for global food production. Supply shortages in the Gulf increase the cost of farming, which inevitably leads to higher food prices for consumers worldwide, worsening food insecurity in vulnerable regions.
What role does debt play in economic recovery?
High levels of government debt leave nations with little capital to respond to external shocks like wars or pandemics. As interest rates rise, countries must divert funds from public services and growth-oriented projects to pay off existing loans.
How does the World Bank define the “lost decade”?
The term refers to a ten-year period where developing countries fail to narrow the income gap with advanced economies, effectively stalling their progress toward higher standards of living and economic stability.
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