Global economic growth will slow to 1.3% - WB: Developing countries will be hit hardest by rising unemployment and inflation
The escalation of the conflict between the United States and Iran could fuel inflation, raise interest rates and reduce global growth to 1.3%, from 2.9% last year, the World Bank's chief economist, Indermit Gill, warned in an interview with Reuters.
Gill said the World Bank had modeled three scenarios in its June economic forecast, given the high uncertainty surrounding the war in the Middle East, but the worst-case scenario of hostilities lasting six months or more is now close to being realized. Under that scenario, global inflation would reach 4.5%.
Prolonged fighting and damage to the region's oil infrastructure would also deepen food insecurity by disrupting shipments of fertilizers, helium and sulfur needed for agriculture, triggering a chain of secondary effects that could include higher interest rates, Gill said. His comments were the first by a senior World Bank official since tensions between Washington and Tehran escalated and the collapse of an April ceasefire agreement that had fueled hopes of a more moderate impact on the global economy.
But the war has escalated in the past two weeks, with US forces bombing targets in southern and western Iran, while Tehran has retaliated by striking US bases in Bahrain, Kuwait and Jordan. Shipping in the Strait of Hormuz remains blocked, while Yemen's Iran-aligned Houthi rebels have announced a naval blockade of Saudi shipments through the Bab el-Mandeb Strait, which leads to the Red Sea.
Gill said that poor countries that had not recovered from the COVID-19 pandemic could face greater food insecurity, while nations with high levels of debt will be hit by rising borrowing costs, undermining spending on education, health and other vital services.
The World Bank’s forecast suggests that 40% of low- and middle-income countries are already in debt distress, or at high risk of becoming in distress. The average debt-to-GDP ratio for developing countries was about 74% in 2025, well above the 50 or 55% before the pandemic began in late 2019. For low-income countries, this ratio has risen to 67%, from about 40% at the end of 2019.
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