The world economy is facing its weakest expansion since the pandemic as the war in the Middle East sends energy prices skywards and inflation climbing, according to sobering new forecasts from three key institutions. The World Bank now expects global growth of just 2.5 per cent in 2026, down from 2.9 per cent last year, and warns the number could sink to 1.3 per cent if energy supply disruptions prove more severe and financial market stress intensifies. The International Monetary Fund and the European Central Bank separately slashed their eurozone outlooks, with the single-currency bloc bearing a disproportionate burden.

The IMF cut its eurozone growth projection to 0.9 per cent this year, from 1.1 per cent in April, and sees only 1.2 per cent in 2027. It raised the inflation forecast to 2.8 per cent, up 0.2 points. The ECB was even more pessimistic, estimating 0.8 per cent growth in 2026 and lifting its inflation call to 3 per cent. Both institutions blamed the Israel–US military campaign against Iran, which has upended energy markets. The conflict is acting as a negative supply shock, weakening confidence and tightening financial conditions on top of Europe’s chronic structural challenges, such as ageing populations and sluggish productivity.
The World Bank’s semi-annual Global Economic Prospects report laid out the global spillovers. It forecasts oil averaging $94 a barrel this year – a 36 per cent jump on 2025 – feeding directly into headline inflation of 4 per cent worldwide. Two-thirds of all economies have seen their growth forecasts reduced, with the steepest downgrades hitting energy-exporting nations in the Middle East. Developing countries are especially exposed; the bank is making up to $60 billion available to the hardest-hit. Viewed from Washington, the fear is that a prolonged conflict could tip fragile states back into crisis, derailing the post-pandemic recovery.
India stands as a rare exception. The World Bank raised its growth forecast for the country to 6.6 per cent for the 2026–27 fiscal year, up from a January estimate of 6.5 per cent, making it the fastest-growing major economy. Analysts in London point to resilient domestic demand and a lower direct exposure to the energy supply routes disrupted by the war. South Asia overall is expected to expand 6.3 per cent, helping to anchor emerging-market growth even as the rest of the world slows.
Looking ahead, the baseline assumptions of a gradual easing in energy markets and a recovery in trade remain fragile. The IMF dryly noted that ‘the prospects for the eurozone have weakened’ and that its forecasts are already below pre-war expectations. Should the conflict widen or sanctions tighten, the path could be even darker. For now, the global economy braces for what the World Bank calls the lowest growth since the onset of Covid-19, with the scars of inflation and higher borrowing costs lingering well into 2027.