An escalation of military conflict between the US and Iran threatens to reaccelerate global inflation to 4.5%, push up interest rates, and slow world economic growth to 1.3% from 2.9% a year earlier, World Bank Chief Economist Indermit Gill said. The bank’s worst‑case scenario, involving sustained hostilities of at least six months, is now beginning to materialize.
The situation in the Middle East has worsened after US strikes on targets in southern and western Iran and Iran’s retaliatory attacks on US bases in Bahrain, Kuwait, and Jordan. Disruptions to shipping in the Strait of Hormuz and a Houthi‑declared blockade of shipments from Saudi Arabia through the Bab al‑Mandeb Strait threaten global food security by disrupting flows of fertilizers, sulfur, and helium.
The poorest and most highly indebted countries will suffer the most, while the largest economies — the US, China, and India — will be relatively insulated. In 2025, the average debt‑to‑GDP ratio for developing countries rose to 74% from about 50–55% in the pre‑pandemic period. Around 40% of low‑ and middle‑income countries are already experiencing debt crises. A likely rise in interest rates will force them to cut spending on health and education.
Gill described the unfolding crisis as a slow‑motion train wreck. Signs of financial stress are already emerging. Pakistan has asked the US for a $10-billion currency stabilization facility, and several other countries have approached the IMF to increase their lending limits.
The only bright spot for developing countries is artificial intelligence. Automation may affect only about 10% of workers there versus 30–40% in advanced economies, though meaningful benefits from the technology are likely to materialize only beyond the current decade.