Gulf Economies Lose Their Oil Advantage as Hormuz Disruption Drives MENAAP Into Contraction

The World Bank projects the Middle East, North Africa, Afghanistan and Pakistan region to contract by 2.1 percent in 2026 as conflict and disruption to the Strait of Hormuz sharply reduce Gulf hydrocarbon production and exports. Yet the economic damage is highly uneven: oil importers remain comparatively resilient, while the report argues that longer-term growth will increasingly depend on whether countries can diversify, strengthen resilience and convert an uneven AI transition into broader productivity gains.

The Middle East, North Africa, Afghanistan and Pakistan are entering an economic cycle defined less by a uniform regional slowdown than by sharply diverging fortunes. The World Bank's From Divide to Opportunity: AI, Jobs, and Growth report projects MENAAP output to contract by 2.1 percent in 2026 after expanding by 3.3 percent in 2025, with the heaviest losses concentrated among economies most dependent on disrupted Gulf energy exports.

Higher oil prices, traditionally a source of strength for Gulf producers, have offered little protection because the central constraint is no longer price but the ability to produce and move hydrocarbons. Disruption around the Strait of Hormuz has cut export volumes, reduced production and exposed how strongly economic resilience now depends on physical access to alternative trade corridors.

Gulf exporters are facing a quantity shock, not a price windfall

In 2022, higher crude prices supported Gulf revenues and growth. In 2026, energy prices rose but producers unable to ship sufficient volumes could not convert those prices into stronger earnings, reversing the familiar relationship between geopolitical tension and hydrocarbon-exporting economies.

Gulf oil production fell from about 26 million barrels per day before the conflict to roughly 16 million in March, while tanker traffic through the Strait of Hormuz dropped sharply. The GCC economies are now projected to contract by 4.3 percent in 2026, a downturn comparable in scale with their contraction during the COVID-19 pandemic.

Exposure varies widely inside the Gulf. Qatar is projected to shrink by 20.9 percent, its weakest performance in more than five decades, while Iraq is forecast to contract by 12.4 percent. Bahrain, Iraq, Kuwait and Qatar are among the most vulnerable because they have fewer immediate alternatives to Hormuz, while Oman, Saudi Arabia and the United Arab Emirates have been partly shielded by access to other export routes.

Infrastructure has become a critical economic dividing line. Pipelines, ports outside the Gulf and alternative maritime corridors have softened losses where they exist, but rerouting is more expensive and remains vulnerable to further disruption. The 2026 shock is demonstrating that energy reserves alone offer limited protection when transport systems become the binding constraint.

Oil importers are holding up, but households face a different strain

Developing oil importers have so far proved considerably more resilient. Their combined growth is projected at 4.3 percent in 2026, up from 3.9 percent in 2025, because they are not directly losing hydrocarbon production or export capacity. Their vulnerability is instead arriving through higher fuel, freight, insurance and food costs.

Pressure on living costs is already visible across several economies. Food inflation exceeded 12 percent year-on-year in Qatar in June while overall inflation remained only slightly above 2 percent; Bahrain and Oman recorded food inflation above 7 percent against headline inflation of around 3 percent. Disrupted supply chains and higher transport costs are therefore reaching households even where headline price measures appear comparatively contained.

Fragile economies have far less capacity to absorb those pressures. Afghanistan, Lebanon, Syria, the West Bank and Gaza, and Yemen entered 2026 with damaged infrastructure, displacement, weak labour markets and declining humanitarian support. Trade and fuel disruptions can quickly translate into falling purchasing power where families already devote much of their income to food and other necessities.

Poverty consequently sits at the centre of the regional risk rather than at its margins. MENAAP is the only region where poverty continues to rise while the global trend is moving downward, and food insecurity remains particularly severe in the West Bank and Gaza and Yemen, with significant pressures also present in Afghanistan, Djibouti, Lebanon and Pakistan.

A powerful 2027 rebound could conceal weak underlying growth

A sharp recovery is possible if conflict-related disruptions ease by the end of 2026. World Bank modelling projects growth excluding Iran could rebound to 7.8 percent in 2027 as hydrocarbon production is restored and trade routes normalize. Such a number would appear dramatic after the 2026 contraction, but its composition is more important than its size.

Much of the rebound would come from bringing lost oil and gas output back online rather than from stronger productivity or an improvement in long-term growth capacity. Production returning from an unusually depressed base can generate very high annual growth without fundamentally altering the structural weaknesses that left economies exposed to the initial shock.

Policy choices during the recovery period will therefore determine whether output restoration becomes broader resilience. Protecting vulnerable households, maintaining essential services, rebuilding productive capacity and strengthening energy and transport infrastructure are central because temporary disruptions can otherwise leave permanent losses in living standards and human capital.

Fiscal space is another constraint. Governments that cushion households through subsidies, administered prices or other emergency measures may reduce immediate inflation but shift more of the cost onto public budgets. Prolonged elevated global interest rates would add another layer of pressure by increasing borrowing and refinancing costs across economies already facing narrow fiscal room.

AI is creating a second divide across the region

Beyond the conflict, a different economic split is taking shape around artificial intelligence. Saudi Arabia and the United Arab Emirates stand apart as the region's only economies in the global top 25 for both AI model development and high-performance computing capacity. Egypt, Jordan, Morocco, Pakistan and Tunisia combine growing technical capabilities with sizeable readiness gaps, while fragile economies still face basic electricity, connectivity and institutional constraints.

The immediate labour-market risk is smaller than fears of wholesale automation might suggest. Near-term automation threatens less than 10 percent of jobs in MENAAP, while AI could raise productivity in roughly 13–20 percent of jobs. The larger question is whether firms and workers are positioned to turn technological availability into actual productivity gains.

Three barriers stand out: localization, usage and foundational capital. Regional languages and local institutional data remain poorly represented in many AI systems, productive adoption by firms is shallow, and gaps in skills, broadband and reliable electricity constrain use across large parts of the region. Arabic alone accounts for less than 1 percent of frontier-model training data despite being spoken by more than 500 million people.

Private-sector weakness could prove just as limiting as technology gaps. Only 16 percent of firms introduced a new product or service over the previous three years, compared with 29 percent in other emerging and developing economies, while 24 percent invested in physical capital and fewer than one in five offered formal worker training. An AI strategy built around computing power without stronger firms, skills and institutions would therefore risk concentrating gains rather than spreading them.

Overall, MENAAP's economic story is being shaped by two simultaneous tests. Conflict is revealing how vulnerable hydrocarbon wealth can become when trade routes and infrastructure fail, while AI is exposing how unevenly the region is equipped for the next wave of productivity growth.