The latest World Economic Outlook report from the International Monetary Fund (IMF) has significantly downgraded the economic growth forecasts for countries in the Middle East. International observers widely believe that the protracted conflict involving the US, Israel, and Iran is severely impacting energy sectors, livelihoods, and economic development in the Middle East, particularly in Gulf nations, placing new pressures on regional economic transformation.
Economic growth is slowing. In the IMF's most recent report, the economic growth forecast for the Middle East and Central Asia region for this year was sharply reduced by 2 percentage points to 1.9%. The forecast for the Middle East and North Africa region was cut by 2.8 percentage points to 1.1%. A World Bank report from early April indicates that the overall economic growth of Gulf countries will slow to 1.3% by 2026, a decrease of 3.1 percentage points from the January forecast. The report notes that Qatar's economy, which relies heavily on natural gas exports, is projected to contract by 5.7%. Kuwait's economy, critically dependent on the Strait of Hormuz for imports and exports, is expected to shrink by 6.4%. A recent United Nations Development Programme report suggests the conflict could reduce the Gross Domestic Product of Gulf Cooperation Council member states by 5.2% to 8.5%. Reasons include systemic shocks to energy security and an energy crisis triggered by disruptions to transit through the Strait of Hormuz.
The economic diversification process is suffering setbacks. The conflict not only disrupts economic output but also deals a heavy blow to the multi-hundred-billion-dollar economic diversification strategies pursued by Gulf states in recent years. Service sectors like transportation and tourism are among the first affected. Major regional aviation hubs such as Dubai, Abu Dhabi, and Doha have been impacted, causing widespread interruptions to key flight routes connecting Europe and South Asia through the Middle East. Media in Oman reports that tourism accounts for up to 15% of GDP in some GCC countries and is expected to remain depressed long-term. The World Travel & Tourism Council predicted in mid-March that escalation of the conflict was severely affecting Middle Eastern tourism, causing estimated daily losses of around $600 million.
The financial systems of Gulf countries are simultaneously facing multiple pressures including capital outflows, market volatility, and financing obstacles. A Middle Eastern economic website noted that stock markets in Saudi Arabia and the United Arab Emirates triggered circuit breakers multiple times in March, accompanied by rapid foreign capital withdrawal. A report pointed out that persistent attacks on infrastructure in Gulf nations have led international credit rating agencies to revise the sovereign credit outlook for some countries to negative, pushing up overseas borrowing costs and forcing the postponement of numerous planned investment projects. The CEO of Qatar Energy expressed pessimism, stating that the financial shock from the conflict has set the economic diversification process back by 10 to 20 years.
Furthermore, the resilience of the region's emerging digital industry is being severely tested. Infrastructure for Amazon Web Services located in the UAE and Bahrain has been damaged, causing disruptions to related cloud services. An analysis highlighted that computing power infrastructure is inextricably linked to national security and economic resilience. In this area, the advantages once held by Gulf states are now being questioned.
Faced with a forced transformation and defensive contraction, the Middle Eastern conflict has pressed a "slow-down button" on the Gulf economy, effectively conducting a stress test on its deeper economic transformation strategy. Confronted with the persistent threat of stifled import and export routes, Gulf nations are initiating comprehensive risk-aversion adjustments centered on preserving "sovereign survival," seeking methods to break the impasse.
Saudi Arabia is attempting to bypass the Strait of Hormuz by enhancing the crude oil export capacity of its Red Sea ports. The role of ports like Jeddah and Rabigh as regional backup options for cargo is being strengthened. Oman is actively promoting its ports at Sohar, Duqm, and Salalah as alternative entry points for goods into the Gulf region. The UAE is exploring routes to transport goods overland to Saudi Arabia's Red Sea ports for shipment, while also increasing its reliance on air freight.
Adjustments are also being made to civilian livelihood systems. Regarding water security, Gulf countries are urgently tendering for the construction of small, decentralized water plants to avoid systemic failure from a single point of disruption. They are also comprehensively utilizing technologies like underground reservoirs and aquifer recharge to safeguard this essential resource.
Additionally, the allocation strategies of the region's massive sovereign wealth funds are beginning to shift. Faced with dual uncertainties from geopolitics and markets, several sovereign funds have reportedly begun reviewing their investment portfolios. Contemplated measures include pausing new investment commitments and divesting certain sensitive assets. Analysis suggests that adjusted capital may accelerate its flow back to domestic and friendly neighboring regions to support local livelihood stability and supply chain security. Future investment focus may increasingly tilt towards Global South nations.