Downside risks outweigh upside factors as Middle East conflict and trade uncertainty cloud outlook; expanded AI investment seen as potential growth driver

The World Bank has set its global economic growth forecast for this year at 2.5%, warning that fallout from the Middle East conflict and rising energy prices will slow the world economy to its weakest pace since the COVID-19 pandemic.

The World Bank released its June 2026 Global Economic Prospects report Thursday, projecting global growth of 2.5% this year, according to the Ministry of Economy and Finance.

That is 0.4 percentage points below last year's growth rate of 2.9% and a 0.1-percentage-point downward revision from the bank's January forecast of 2.6%.

World Bank logo [Reuters]
World Bank logo [Reuters]

The World Bank said rising energy prices and inflationary pressure stemming from the Middle East conflict are the main reasons for the downward revision. Assuming the conflict remains contained and energy supply recovers, the bank expects global growth to rebound to 2.8% in both 2027 and 2028.

The bank warned that downside risks to this year's outlook outweigh upside factors. A resumption of fighting in the Middle East, a prolonged strait blockade, greater trade policy uncertainty, monetary tightening, and climate disasters could drag global growth down by an additional 0.4 to 0.8 percentage points, it warned.

On the upside, the bank said expanded AI investment and productivity gains from AI adoption could lift growth.

By region, advanced economies are forecast to slow from 1.8% last year to 1.5% this year. The United States is expected to grow 2.2%, with solid consumer spending and robust AI investment partly offset by the drag from the Middle East conflict.

The eurozone is projected to grow just 0.8%, heavily exposed to the energy price surge through its high dependence on imported natural gas and crude oil. Japan is also expected to post growth of only 0.7%, as higher energy costs weigh on consumption and exports.

Growth in emerging markets and developing economies is forecast to ease from 4.4% last year to 3.6% this year.

China is expected to slow to 4.2% growth as its real estate sector continues to contract, though the bank said strategic oil reserves and a high share of renewable energy will cushion some of the shock from the Middle East conflict. East Asia and the Pacific as a whole is also projected to grow 4.2%, weighed down by China's slowdown and the region's dependence on Middle Eastern oil and gas.

South Asia, by contrast, is expected to hold up relatively well, with the World Bank forecasting regional growth of 6.3%. India is projected to expand 6.6%, entering a recovery phase after a temporary slowdown and maintaining a stable growth foundation.

The Middle East and North Africa region is expected to take the hardest hit from the conflict. The bank set its growth forecast for the region at 1.6% this year, citing disruptions to energy production and exports as the primary cause — a figure 2.7 percentage points below its January projection.

The World Bank did not provide a separate growth forecast for South Korea. The bank publishes its Global Economic Prospects twice a year, in January and June, but does not include a standalone outlook for the Korean economy, it said.

The bank forecast international oil prices will average $94 per barrel this year, up $34 from its January projection of around $60. Global trade volume growth is expected to come in at 2.9%.

On policy priorities, the bank called on the international community to expand multilateral trade frameworks and strengthen international cooperation to bolster energy and food security, while accelerating the energy transition. For developing economies, it said controlling inflation, maintaining financial stability, and securing fiscal health are essential, on top of expanding investment in physical and human capital, creating business-friendly environments, and mobilizing private financing to build a foundation for job creation.


y2k@heraldcorp.com