Overview
The World Bank's top economic modeller warned that a sustained escalation of hostilities involving the United States and Iran could materially worsen global macroeconomic outcomes, lifting inflation, forcing up interest rates and shrinking growth. Under the bank's worst-case projection - a scenario premised on conflict persisting for six months or more - global expansion could slow to 1.3% in 2026, down from 2.9% the prior year.
Modelled scenarios and current trajectory
The chief economist said the institution built three possible outcomes into its June forecast because of heightened uncertainty about the war in the Middle East. Of those, the most adverse scenario has already moved closer to actual events, he said in a late Tuesday interview.
Under that severe outcome, headline global inflation would climb to 4.5%. The economist emphasized that prolonged fighting and damage to oil infrastructure in the region could ripple through commodity markets and supply chains, producing secondary effects that include intensified food insecurity and upward pressure on borrowing costs.
Energy, shipping and agricultural supply channels
Fighting that harms the region's energy and transport networks would worsen market tightness, the economist warned. Shipping disruptions have already been recorded in strategic chokepoints: movements through the Strait of Hormuz remain affected, and Yemen's Iran-aligned Houthi forces announced a naval blockade on Saudi shipments passing through the Bab el-Mandeb strait into the Red Sea. Those bottlenecks raise the risk of higher energy prices and fractured trade flows.
Beyond hydrocarbons, the conflict threatens agricultural inputs. Damage or interruptions to shipments of fertilizer and industrial inputs such as helium and sulphur - materials cited as important to planting and processing - would heighten food insecurity in vulnerable countries, setting off further knock-on effects for inflation and policy.
Interest rates, debt service and development spending
The economist noted that many low- and middle-income countries that had not fully recovered from the COVID-19 shock are particularly exposed. As inflation accelerates and central banks respond by raising policy rates, nations with high debt burdens would face steeper borrowing costs, squeezing fiscal space for education, health and other essential services.
"My own sense of it is, maybe we are a few months away from that, you know, because you haven’t yet started to see policy rates go up," he said, adding that once inflation picks up, heavily indebted countries could find themselves confronting serious difficulties in meeting debt service obligations within months.
Signs of fiscal strain were already visible, he said. A number of cash-constrained governments have asked the International Monetary Fund to bolster existing loan arrangements. In a recent case noted by a source briefed on the matter, Pakistan sought a $10 billion exchange stabilization facility from the United States.
Debt distress and macro vulnerability
The World Bank's June forecast indicated that 40% of low- and middle-income countries were either in debt distress or at high risk of it. That tally equates to 32 countries under current classifications, but the number could climb rapidly should interest rates rise further, the economist said.
He described a scenario in which countries that continue servicing external liabilities will be forced to divert scarce resources from investments in human capital and other areas critical to future growth. "It’s just a slow-moving train wreck," he said.
Measured across emerging market and developing economies, the average debt-to-GDP ratio stood at about 74% in 2025, notably higher than pre-pandemic ratios near 50-55%. For low-income countries the ratio was roughly 67% in 2025, up from about 40% before the pandemic.
Addressing some cases will require tailored debt relief, the economist said, and while the Group of 20 major economies has made incremental progress on reforms to the debt restructuring process, improvements have been gradual.
Geopolitical developments referenced
He made these remarks as hostilities between the United States and Iran intensified. U.S. forces conducted strikes in Iran's south and west, while Iran struck U.S. targets in Bahrain, Kuwait and Jordan. The earlier collapse of an April ceasefire that had tempered expectations of a contained conflict was also highlighted as a turning point in assessing risk.
Emerging technological offsets - AI opportunity for developing countries
Alongside the downside risks, the World Bank analysis pointed to a structural opportunity for many developing countries from artificial intelligence. A new bank assessment found that only about 10% of people in poorer countries are likely to be negatively affected by AI, compared with roughly 30-40% in richer nations. That, the economist said, positions AI as a potentially large net benefit for developing economies.
He suggested AI could materially enhance productivity and help restore growth to levels not seen in decades, but he cautioned that such gains are unlikely to be realized within the current decade.
Concluding assessment
The central takeaway from the World Bank's chief economist is a stark one: if the conflict broadens or endures, macroeconomic outcomes for many countries could deteriorate quickly. Inflation and interest rates rising together would strain debt-laden governments and curtail spending on services that underpin long-term growth. While large economies such as the United States, China and India have shown relative resilience so far, developing nations face a more precarious set of trade-offs, and some will likely require case-by-case debt relief and additional support should conditions worsen.
The balance of risks remains tilted to the downside in the near term, with technological change a possible, but distant, counterweight for growth in poorer countries.