The escalation of hostilities between the United States and Iran could reduce global economic growth to 1.3 per cent this year, down from 2.9 per cent in 2025, and push headline inflation to 4.5 per cent, the World Bank’s chief economist, Indermit Gill, has warned. In an interview late on Tuesday, Gill said the bank’s most pessimistic scenario—which assumes fighting lasting six months or more—is now close to being realised. Under that projection, global inflation would reach 4.5 per cent, and a prolonged conflict would disrupt shipments of fertiliser, helium and sulphur, deepening food insecurity and setting off secondary effects that include higher interest rates.

Viewed from Jakarta, Bank Indonesia has also revised its global inflation forecast upwards to 4.5 per cent for 2026, while projecting that world economic growth will remain weak at 3 per cent. Governor Perry Warjiyo attributed the deterioration to the re-escalation of the US-Iran war in early July 2026, which has again obstructed traffic in the Strait of Hormuz, disrupting production, trade supply chains and driving up oil and commodity prices. The central bank expects the US Federal Reserve to raise its policy rate earlier, in the fourth quarter of 2026, and notes that yields on 10-year US Treasuries had already climbed to 4.56 per cent by 20 July.

Gill cautioned that poor countries still recovering from the Covid-19 pandemic face greater food insecurity, while highly indebted nations will be squeezed by rising borrowing costs, forcing cuts to education, health and other essential services. He estimated that once inflation accelerates, it could be only a few months before heavily indebted countries encounter grave problems servicing their debts. Signs of strain are already visible: according to a source briefed on the matter, Pakistan this week asked the United States for a US$10 billion exchange stabilisation facility, and some cash-strapped countries have requested the International Monetary Fund to augment existing loans. The World Bank’s June forecast showed that 40 per cent of low- and middle-income countries—32 nations—were either in debt distress or at high risk of falling into it, a number Gill said could rise quickly if interest rates increase.

The war intensified this week with US forces bombing targets in southern and western Iran and Tehran striking American sites in Bahrain, Kuwait and Jordan. Shipping through the Strait of Hormuz remains disrupted, and Yemen’s Iran-aligned Houthis announced a naval blockade on Saudi shipments via the Bab el-Mandeb strait. The escalation follows the collapse of an April ceasefire agreement that had raised hopes of containing the conflict’s economic fallout. Gill noted that the largest economies—the US, China and India—have so far been relatively insulated, each drawing on different sources of resilience, while developing countries face greater challenges. In Jakarta, Warjiyo called for strengthened fiscal and monetary policy synergy to reinforce external resilience and maintain domestic stability amid the renewed global uncertainty.