World Economy in Spring 2026: Middle East Conflict Hampers Economic Activity

Klaus-Jürgen Gern, Stefan Kooths, Johanna Krohn, Wan-Hsin Liu and Jan Reents

No 131, Kiel Institute Economic Outlook from Kiel Institute for the World Economy

Abstract: The world economy remained robust in 2025 despite the strains caused by the trade conflicts and the resulting increased uncertainty and entered the new year with decent momentum. However, the war with Iran now threatens to severely disrupt energy supplies, with potentially serious consequences for economic activity. It is, however, currently widely expected that production and transport of oil and gas from the Persian Gulf will return to normal levels relatively soon. In this case, which also forms the basis of our forecast, the effects would not be substantial and would be limited to a slight dampening of global production and a temporary rise in inflation. We therefore expect the global economy to remain on an upward trend, buoyed by strong impetus for trade and investment from the boom in AI technology. Monetary policy has been significantly loosened worldwide over the past year and is now supporting the economy in most countries. In addition, a number of countries are providing stimulus through fiscal policy. While the economic outlook in China remains clouded, the expansion in the United States should remain robust. In Europe, the gradual economic recovery is likely to continue from the second half of this year onwards, following a few months of slowdown caused by high energy prices. All in all, and unchanged from our forecast of last December, we expect global output - measured on the basis of purchasing power parities - to grow by 3.1 percent this year and 3.2 percent next year. However, given the uncertainty surrounding the developments in the Middle East, there is a significant risk of a considerable slowdown in the global economy.

Date: 2026
New Economics Papers: this item is included in nep-ara, nep-ene and nep-mac
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