World Economy in Autumn 2026: Middle East conflict Hampers economic activity

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

No 136, Kiel Institute Economic Outlook from Kiel Institute for the World Economy

Abstract: Despite higher energy prices and heightened geopolitical risks, the expansion of the global economy slowed only modestly in spring 2026. Pronounced declines in output were confined to the countries in the Persian Gulf region, while GDP continued to expand at a comparatively strong pace in most other economies. Global economic activity is likely to have regained momentum over the summer months. The boom in AI technology continues to fuel activity, stimulating trade and investment and driving economic growth particularly in Asia. An end to the conflict in the Gulf is not currently in sight, and oil prices have risen again recently. Financial markets nevertheless appear to be pricing in the expectation that oil and gas production and transportation in the Gulf region will return to normal in the foreseeable future. However, the risks remain considerable. Forward prices for crude oil decline only gradually as the delivery date moves further into the future. Against this backdrop, we have raised our forecast for global output growth, measured at purchasing power parity, from 2.9% to 3.0% for this year. For next year, we continue to project growth of 3.2%, and we expect the same rate of expansion in 2028. Given the assumed path of energy prices, inflation is likely to ease only gradually. In addition to the risk of another substantial rise in oil prices in the event of a prolonged closure of the Strait of Hormuz, the marked increase in long-term interest rates is also a source of concern. Higher long-term rates are putting additional pressure on public finances and are also making it more difficult to finance private investment.

Date: 2026
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