PNN – A regional war, with its long-lasting repercussions, has plunged the economies of the Persian Gulf states into an unprecedented wave of recession.
According to the report of Pakistan News Network; the war waged by the United States and the Zionist regime against Iran—which escalated into a regional conflict following a crushing response from our country—has exposed the fragility of the Persian Gulf states across various domains, including security and the economy. Recent assessments now paint a bleak picture of the economic performance of these nations.
Unprecedented Economic Downturn in Gulf States amid Regional War
In this context, the economies of the Gulf Cooperation Council (GCC) states are facing their third major downturn in nearly 50 years. The International Monetary Fund (IMF) projects that the economies of five Gulf nations will contract by 2026, weighed down by the repercussions of a war involving the U.S., Israel, and Iran.
Estimates indicate that—for the first time in over half a century of available data—the economies of three Gulf States are set to shrink by more than 10 percent within a single year.
The International Monetary Fund forecasts that the economies of Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, and Bahrain will contract by 3.3%, 3.9%, 15.6%, 16.7%, and 11.3%, respectively, while Oman’s economy is expected to grow by 4.1%.
The primary reasons for this economic downturn include a decline in oil and gas exports—driven by disruptions to maritime transport—as well as a drop in tourism and travel resulting from attacks targeting the Gulf states.
Decline in Energy Exports: The Primary Driver of Economic Stagnation in Gulf States
In a recent analysis, the Gulf Cooperation Council (GCC) macroeconomics division at Oxford Economics identified the decline in energy exports as the principal factor behind the current economic stagnation in Gulf nations. Furthermore, the repercussions of the conflict have extended to the tourism and travel sectors—industries that have gained significant prominence over the past two decades and have become key pillars of the economies of several Gulf States.
Of course, this is not the first wave of its kind; the region has previously experienced two waves of widespread economic downturn. The first wave began during the oil market crisis in the first half of the 1980s, when the economies of Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait fell into recession in 1982; this downturn recurred in 1985, with Bahrain also joining the list.
That crisis was linked to a decline in oil demand and a reduction in production—aimed at supporting prices—as well as a drop in output in some countries due to the depletion of oil fields.
The second wave occurred in 2020, when the economies of the six Gulf Cooperation Council (GCC) countries fell into recession, impacted by the COVID-19 pandemic and a collapse in oil demand.
Escalation of the Saudi Crisis amid New Dynamics in Yemen
Among the Persian Gulf states, Qatar, Kuwait, and Bahrain are more dependent on the Strait of Hormuz—for both energy exports and the import of goods and production inputs—than their neighbors. Saudi Arabia, however—being the largest nation in the region and possessing more robust infrastructure—faced fewer immediate repercussions at the onset of the war; yet, this was not the end of the story.
While Saudi Arabia—like other nations—was affected by the repercussions of a regional war and the potential closure of the Strait of Hormuz, the naval blockade imposed on the Saudis from the direction of Yemen, coupled with the gradual escalation of the conflict, placed the Kingdom under intense pressure and created further challenges for its oil exports.
Due to the blockade imposed on Saudi Arabia from Yemen—affecting the Red Sea and the Bab el-Mandeb Strait—the Saudis have been forced to route their oil exports via the Suez Canal, a detour that adds a month to the vessels’ transit time.
Over the past few weeks, the Yemenis have significantly intensified their multi-front attacks against Saudi Arabia. In addition to targeting energy infrastructure, they have launched heavy strikes on the country’s airports, causing widespread disruption to air traffic.
Meanwhile, intense attacks on Saudi Arabia’s oil infrastructure—specifically Aramco facilities—are ongoing, and the Yemenis have threatened to strike further energy installations within the Kingdom.
In this context, observers warn that the continued escalation of tensions will negatively impact normal economic activity in Saudi Arabia; the repercussions of the war have spread beyond the energy sector to affect a broad range of economic areas, including tourism, aviation, and commerce.
Meanwhile, Saudi Arabia—much like other Gulf States—is striving to move away from an oil-dependent economy and expand non-oil sectors, such as tourism. However, this objective cannot be realized amidst the current state of insecurity; furthermore, the persistence of tensions could negatively impact the Hajj pilgrimage, a significant source of revenue for the Saudi treasury.
These repercussions also severely undermine Saudi Arabia’s standing as a global hub for travel and aviation. Airlines have cancelled or suspended thousands of flights, while others have been forced to reroute following the closure of Saudi airspace.
Sharp Decline in Air Traffic
By October, flights operated by major Persian Gulf airlines had returned to levels approaching those seen before the war. However, the resumption of flights did not prevent a sustained decline in passenger traffic. The number of passengers passing through Dubai International Airport fell by 31.3 percent in the first half of the year, reaching 31.5 million—down from 46 million during the same period the previous year.
Forecasts from the International Air Transport Association (IATA) highlight the immense pressure facing the sector, projecting that airlines in the region will shift from a net profit of $7.2 billion in 2025 to a net loss of $4.3 billion in 2026.
Since the onset of the war, Jebel Ali Port—the largest port in the region and one of the world’s major container ports—has remained operational, though access to it has become more complex. Some shipments faced longer wait times, goods were diverted to other ports, and a significant portion of maritime trade shifted to the ports of Khor Fakkan and Fujairah, located outside the Strait of Hormuz.
These route changes and the use of additional modes of transport have led to an increase in shipping costs. The National Association of Freight and Logistics (NAFL) of the United Arab Emirates reports that the cost of shipping certain cargoes to the Persian Gulf has risen to three to five times previous levels, driven by additional expenses related to the risk of war, route diversions, and supplementary transport requirements. This may, to some extent, be reflected in the final prices paid by consumers for these goods.
Meanwhile, seaborne imports destined for Kuwait, Qatar, and Bahrain have become dependent on alternative ports located outside the Strait of Hormuz, or on overland transport via Saudi Arabia—a route characterized by high costs and significant congestion.
Shock and Crisis in Financial Markets
The impact of the war has extended to the stock markets of the Persian Gulf, with listed sectors experiencing severe pressure during the initial weeks of escalating tensions.
According to an MSCI analysis of the composite stock index for the Gulf Cooperation Council (GCC) member states, the real estate, information technology, and industrial sectors declined by approximately 22%, 12%, and 10%, respectively, during the first three weeks of the war—up to March 20.
These pressures present the economies of the Gulf States with challenges regarding financing the impact of the war, sustaining existing investments, and redirecting expenditures toward more essential sectors. These challenges involve a complex interplay between economic considerations and the requirements for long-term security and stability.
Reordering Priorities
The consequences of the war are compelling the Gulf States to re-evaluate their spending and investment priorities—a process that did not begin with the current escalation of conflicts.
Against this backdrop, observers believe that these new pressures may accelerate this process, prompting the Gulf States to shift their focus from large-scale development projects toward healthcare, education, and quality of life. Furthermore, expenditures on air defense, the fortification of facilities, and the development of local military industries may compete for available resources against investments in other types of projects.
The Heavy Shadow of War Looms over Investments in the Gulf States
This shift in priorities is not limited solely to domestic spending; it may also extend to the foreign commitments of the Gulf States. In this context, the Financial Times reported that, faced with financial pressures, Gulf nations have begun reviewing their foreign investments and commitments.
This comes at a time when such foreign investments and commitments hold significant importance for the Gulf States, serving as a tool to expand their influence and forge international relations.
A study published in 2026 by the German Institute for International and Security Affairs regarding sovereign wealth funds in Qatar, the United Arab Emirates, and Saudi Arabia concluded that these funds expand the foreign policy options available to their owners, and that it is difficult to disentangle economic from political motives in any given investment.
Consequently, any reduction or postponement of foreign investments and commitments could raise concerns regarding a potential decline in this instrument of influence.
The International Monetary Fund estimates that even if the war were to end, economic activity would not return to normal. Disruptions to travel and shipping are forcing companies to reroute their operations and rethink their supply chains—a shift likely to leave lasting effects, even after energy supplies are restored.
Observers emphasize that the recovery of the aviation, tourism, and logistics sectors may take longer than that of energy supplies, as companies seek to minimize their exposure to future disruptions. Furthermore, the pace of recovery in these sectors depends on credible security guarantees—assurances to individuals and businesses that a new wave of attacks and conflict will not recur.
Consequently, should disruptions recur, investors may demand guarantees, safe-exit plans, or higher returns to compensate for the risks. These repercussions could also extend to skilled foreign workers, as the safety of employees and their families—alongside rising insurance and business costs—becomes a factor in hiring decisions within Gulf countries.
Economic experts believe that the recovery of Gulf nations will be a lengthy process, extending well into the months following the war. Furthermore, the extent to which these countries succeed in addressing the economic fallout of the conflict will depend on their financial reserves.