Gulf Economies Face Downturn Amid Ongoing Conflict Disrupting Energy Markets

Overview of the Current Situation#

The Gulf Cooperation Council (GCC) economies are encountering their most significant downturn since the pandemic, primarily due to the ongoing conflict involving the U.S., Israel, and Iran. This situation is causing disruptions in energy markets and regional stability, as reported by a recent poll.

Impact on Energy Markets#

The conflict has led to a supply shock in global energy markets, resulting in soaring oil prices. However, unlike previous instances where oil price increases benefited Gulf countries, this time, damage to infrastructure and the near closure of the Strait of Hormuz—a crucial passage for about 20% of the world's energy—has severely affected production and exports.

Revised Economic Forecasts#

As a result of these disruptions, economists have significantly downgraded growth forecasts for 2026. Countries like Qatar, Kuwait, and Bahrain are now expected to see contractions of 6.0%, 4.4%, and 2.9%, respectively, reversing earlier predictions of growth. The UAE is projected to stagnate, down from an anticipated 5% growth.

Saudi Arabia and Oman are expected to perform slightly better, with growth projections of 2.6% and 2.2%, although these figures are still lower than previous estimates.

Future Outlook#

Analysts caution that the economic repercussions will linger, with the rebuilding of energy infrastructure and restoration of supply chains not expected to be completed until late 2026. Key sectors, such as tourism and retail, are also likely to suffer. However, if the conflict resolves soon, a strong rebound is anticipated in 2027, with Qatar, the UAE, and Kuwait potentially growing by 7.8%, 5.4%, and 5.0%, respectively, driven by recovering energy output and public investments.

Additionally, inflation is expected to rise across the region due to high oil prices, with Bahrain's inflation forecast for 2026 at 2.4% and other GCC countries also facing increased costs. Overall, while the GCC economies are facing a sharp downturn in the short term, a recovery remains possible in the medium term, depending on the resolution of the ongoing conflict and the restoration of energy infrastructure.