Key facts
- Escalating Middle East hostilities could reduce global growth to 1.3% and reignite inflation.
- The World Bank's worst-case scenario for the Middle East conflict, lasting six months or more, is nearing materialization.
- Prolonged fighting could disrupt agricultural supply chains, impacting fertilizer, helium, and sulphur shipments.
- Developing countries face increased risk from rising borrowing costs and debt distress.
- The World Bank's June forecast indicated 32 low- and middle-income countries were in debt distress or at high risk.
- Developing countries may benefit significantly from AI productivity gains, potentially restoring growth.
Escalating hostilities between the United States and Iran could reignite inflation, drive interest rates higher, and reduce global growth to as low as 1.3%, according to World Bank chief economist Indermit Gill. Gill stated that the bank's worst-case scenario, involving conflict lasting six months or more, is nearing materialization.
Gill warned that 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. This could trigger a chain of secondary effects, including higher interest rates, which would disproportionately affect poor countries that have not recovered from the COVID pandemic and nations with high debt levels.
The World Bank's June forecast indicated that 40% of low- and middle-income countries were already in debt distress or at high risk of falling into it, a number that could increase if interest rates climb. Gill noted that countries servicing their debts would drain resources from essential services like education and health, hindering future growth. The average debt-to-GDP ratio for emerging market and developing countries was about 74% in 2025, significantly higher than pre-pandemic levels.
Despite the challenges, Gill highlighted a new World Bank analysis suggesting developing countries could benefit from artificial intelligence, potentially leading to significant productivity gains. He indicated that AI could help restore growth to levels not seen in decades, though likely not within this decade.