The World Bank has issued a stark warning about the potential economic impact of escalating US-Iran hostilities. According to reports from Reuters, World Bank Chief Economist Indermit Gill warned that a prolonged US-Iran conflict could slow global growth to 1.3% in 2026, down from 2.9% last year. Gill, who retires at the end of August, emphasized the severity of the potential economic consequences, stating that the worst-case scenario with hostilities lasting six months or more has already come close to materialising. The warning comes after tensions between Washington and Tehran escalated this week with U.S. forces bombing targets in the south and west of Iran, and Tehran hitting U.S. sites in Bahrain, Kuwait and Jordan. Shipping through key routes including the Strait of Hormuz continues to face significant delays, while Yemen's Iran-aligned Houthis announced a naval blockade on Saudi Arabian shipments through the Bab el-Mandeb strait leading into the Red Sea. Gill's statements mark the first from a senior official at the World Bank since the sharp escalation in tensions and the collapse of the ceasefire agreement reached in April, which had raised hopes of containing the conflict's aftermath.
The economic projections reveal significant inflationary pressures that could emerge from the conflict scenario. As reported by Reuters, under the worst-case scenario with hostilities lasting six months or more, global headline inflation would reach 4.5%. Gill explained that poor countries that had not recovered from the Covid pandemic could face greater food insecurity, while nations with high debt levels would be hit by rising borrowing costs as interest rates climbed, squeezing spending on education, health and other vital services. The conflict could also affect global food supplies through disruptions to shipments of fertilisers, helium and sulphur—materials widely used in agriculture—which could push food prices higher, particularly in developing countries. "My personal estimate is that we may be just a few months away from this, as we have not yet seen the rise in core interest rates," Gill said, noting that once inflation accelerates, heavily indebted countries faced grave problems meeting their debt service payments. He added that once inflation accelerates, it may only take a few months before debt-laden countries experience severe difficulties in meeting their debt service obligations.
One of the biggest concerns is the impact on oil production and transportation, as reported by Reuters. If fighting damages oil infrastructure or continues to disrupt shipping routes, crude oil prices could remain elevated for a prolonged period. Higher energy prices would increase transport and manufacturing costs, feeding into overall inflation. The disruptions are already being felt through key trade routes, with shipping through the Strait of Hormuz continuing to face significant delays. The World Bank's analysis suggests that if fighting continues, global economic growth could slow to just 1.3% in 2026, driven largely by disruptions in energy supplies and global trade. Prolonged fighting and damage to the region's oil infrastructure would also deepen food insecurity by disrupting shipments of fertilizer, helium and sulphur needed in agriculture, setting off a chain of secondary effects that could include higher interest rates. The war escalated this week after U.S. forces targeted sites in southern and western Iran, while Tehran targeted American positions in Bahrain, Kuwait and Jordan.
The economic impact would be most severe on developing nations, which are already facing significant challenges. According to Reuters, Gill warned that 40% of low- and middle-income countries—around 32 nations—are already in debt distress or at high risk of falling into it. The economist described the situation as a "slow-motion disaster," saying countries may continue diverting scarce resources towards debt repayments instead of investing in long-term growth. Rising interest rates could make it even harder for these countries to repay loans while forcing governments to cut spending on healthcare, education and infrastructure. The average debt-to-GDP ratio for emerging market and developing countries was about 74% in 2025, well above ratios near 50-55% before the pandemic that began in late 2019, according to World Bank data. For low-income countries, the ratio was 67%, up from around 40%. Some countries would require debt forgiveness on a case-by-case basis, Gill said, noting that others could see their longer-term growth prospects decline even if they didn't default on their debts. The World Bank's forecasts released in June showed that this equates to 32 countries, but this number could rise rapidly if interest rates continue to climb.
Despite the economic challenges, Gill noted significant opportunities for developing countries in artificial intelligence. According to Reuters, a new World Bank analysis suggests only around 10% of workers in poorer economies are likely to face adverse effects from AI, compared with 30-40% in advanced economies. Gill said AI could eventually help boost productivity and support long-term economic growth in developing nations, although the full benefits are unlikely to materialise within this decade. "AI can be a huge gain for them," Gill said, adding that AI could potentially help restore growth to levels not seen in decades, but probably not in this decade. The G20 has made progress in reforming debt restructuring mechanisms as risks associated with them rise, but the pace of reform remains slow. While the world's three largest economies—the United States, China and India—have so far remained relatively insulated from the direct impact of the conflict, developing countries have fewer resources to absorb prolonged global shocks.
