- Now see volatility replacing optimism
- Global markets brace for prolonged turbulence
The world economy is once again entering dangerous territory. Barely a year after global markets regained some measure of stability from the inflation shocks, supply chain breakdowns and interest-rate turbulence that defined the post-pandemic era, a fresh geopolitical crisis is rapidly rewriting the outlook for growth, trade, investment and inflation across nearly every major region of the world.
Global economists are warning that the continued closure of the Strait of Hormuz could evolve into the biggest economic disruption since the pandemic era, as conflict-driven supply shocks ripple through energy markets, shipping networks and global trade systems.
The growing concern is reflected in the latest World Economic Forum Chief Economists’ Outlook, which shows a sharp reversal in global economic sentiment, with the overwhelming majority of surveyed economists now forecasting weaker global growth over the next 12 months.
The findings represent a reversal from the cautious optimism that prevailed at the beginning of 2026, when easing inflation, improving trade flows and expectations of gradual monetary easing had raised hopes of a more stable global recovery.
Instead, the world economy is now confronting a new phase of geopolitical fragmentation, supply-chain disruption, commodity price instability and deepening uncertainty over the durability of global growth.
“Only months ago, the Chief Economists community was cautiously optimistic. The conflict in the Middle East changed that, and the economic scarring from the situation thus far is already expected to last into the months ahead,” said Saadia Zahidi, managing director of the World Economic Forum.
“The longer the disruption lasts, the heavier the long-term cost for those who can least afford it,” she added.
The most immediate concern centres on the closure of the Strait of Hormuz, through which a significant share of global oil, gas and fertiliser shipments normally passes. Economists surveyed by the Forum already rank the current disruption as more economically damaging than the tariff conflicts that rattled global trade in 2025.
More significantly, many believe that if the disruption persists into the second half of 2026, the resulting economic fallout could begin approaching the scale of the COVID-19 crisis itself.
During the pandemic, global supply chains fractured simultaneously across manufacturing, shipping, aviation and commodities. Today, economists fear a similar pattern is beginning to emerge again, though this time driven less by public health restrictions and more by energy chokepoints, geopolitical confrontation and strategic fragmentation of trade systems.
The closure of Hormuz is already disrupting global fuel supplies, fertiliser flows, shipping routes and transportation costs. About 2,000 commercial vessels reportedly remain stranded within the Gulf region, representing around five per cent of global shipping tonnage.
At the same time, tanker traffic around the Cape of Good Hope has risen as shipping operators attempt to bypass unstable Middle Eastern routes, extending delivery times and raising freight costs across global markets.
Energy markets remain at the centre of the disruption. Chief economists surveyed by the Forum ranked the energy and materials sectors as the industries facing the highest levels of disruption by a substantial margin. Nearly all respondents described current conditions as highly or very highly disruptive.
The consequences are now spreading rapidly through the global economy.
Oil prices have climbed sharply in recent weeks, driving renewed fears of imported inflation across both developed and emerging markets. Fertiliser supply disruptions are simultaneously threatening agricultural output and food production, especially in import-dependent economies already struggling with weak currencies and rising debt burdens.
According to the report, 94 per cent of surveyed chief economists now expect global inflation to rise over the next year. Even under an optimistic scenario involving a relatively short-lived Middle East conflict, the International Monetary Fund expects global inflation to increase from 4.1 per cent in 2025 to 4.4 per cent in 2026.
The implications are enormous for central banks that had only recently begun considering interest-rate reductions after years of aggressive monetary tightening.
Instead of easing financial conditions to support growth, policymakers may now be forced to maintain elevated interest rates for longer as energy-driven inflation pressures re-emerge across global markets.
That combination of weaker growth and persistent inflation is raising renewed fears of stagflation, particularly in Europe, where growth momentum remains fragile and industrial production continues to face high energy costs.
The regional outlook outlined in the report reflects widening economic divergence across the world economy.
The Middle East and North Africa region faces the sharpest deterioration. Only months ago, the region was viewed as one of the more promising growth areas globally. Today, 88 per cent of surveyed economists expect weak or very weak growth conditions across the region.
Sub-Saharan Africa is facing accelerating inflation, considered another challenge entirely.
The report identifies the region as now having the highest inflation expectations globally, reflecting the vulnerability of many African economies to imported fuel costs, currency weakness and food price shocks.
For many low-income countries, rising fertiliser prices could become particularly damaging later in the year as planting cycles and agricultural productivity begin to suffer.
Economists warned that disruptions to food production may have devastating consequences for import-dependent economies already struggling with high debt-servicing costs and constrained fiscal space.
The agricultural sector, while not yet experiencing the same level of disruption as energy and shipping, is increasingly viewed as a delayed-risk sector whose full vulnerability may only become visible later in the year once fertiliser shortages feed into lower crop yields and rising food prices.
The World Economic Forum survey noted that nearly 30 per cent of internationally traded fertilizer typically moves through the Strait of Hormuz. As shortages intensify, analysts expect agricultural disruptions to climb significantly higher on the global risk scale.
Meanwhile, Europe faces mounting stagflation concerns, while China continues to struggle with weak domestic demand, intense price competition and slowing property-sector recovery.
By contrast, India and the United States are expected to remain relatively resilient.
India continues to benefit from strong domestic demand, infrastructure investment and expanding trade relationships, including new agreements with the European Union.
The United States, despite rising policy volatility, retains significant advantages tied to the depth of its capital markets, consumer spending base and artificial intelligence investment boom.
When chief economists were asked to identify the world’s most attractive business environments over the next year, the United States ranked first, with 65 per cent placing it among their top three investment destinations.
India followed with 56 per cent, while Southeast Asia ranked third with 50 per cent.
Europe placed fourth despite its economic challenges, benefiting from perceptions of institutional stability, affluent consumer markets and growing defence and infrastructure spending.
China, once viewed as the unquestioned centre of global manufacturing expansion, ranked fifth.
The report shows multinational corporations are increasingly reassessing their global footprint in response to geopolitical fragmentation and supply-chain risk.
Rather than focusing solely on low production costs, firms are now placing greater importance on supply-chain resilience, strategic flexibility and political stability.
No respondent ranked the Middle East and North Africa region among the world’s three most attractive business environments for the coming year.
The survey also reveals mounting concerns about global financial stability.
Although most economists do not currently expect a full global recession within the next 12 months, volatility risks across financial markets are rising sharply.
79 per cent of respondents expect increased volatility in private debt markets, reflecting growing stress in private credit systems that expanded rapidly during the low-interest-rate era. 74 per cent expect higher volatility in public debt markets, while 68 per cent anticipate increased stock-market turbulence.
The concern is not simply that growth is slowing. Rather, it is that the global economy may be entering a structurally more volatile era where repeated geopolitical shocks, supply-chain fragmentation, climate disruptions and technological realignment continuously undermine economic predictability.
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The report repeatedly emphasises that the global business environment is being reshaped by “new realities.”
Trade itself remains surprisingly resilient for now. Global trade expanded by 7.5 per cent in 2025 to reach a record $35 trillion, while foreign direct investment rose 14 per cent to $1.6 trillion.
However, much of that investment growth occurred within developing economies, and economists now expect the investment environment in 2026 to deteriorate sharply amid worsening geopolitical fragmentation.
The transport and logistics sector is emerging as one of the biggest casualties of the Hormuz disruption. According to the survey, 76 per cent of chief economists described current disruption levels in supply-chain and transport industries as high or very high. Air travel has also been heavily affected.
Departures from major Gulf aviation hubs have reportedly collapsed as conflict risks force rerouting of international flight paths and trigger higher jet-fuel costs.
Tourism flows across the Middle East have weakened, while airlines face rising operational costs and longer routes that threaten profitability.
65 per cent of surveyed economists identified the leisure and travel sector as facing severe disruption.
Meanwhile, the defence industry is experiencing a different kind of shock altogether. Rising geopolitical tensions are accelerating military spending globally and intensifying competition around defence technology development. 64 per cent of respondents identified defence as a sector experiencing high or very high disruption, not necessarily because of contraction, but because of rapidly changing strategic dynamics and technology races triggered by conflict escalation.
Artificial intelligence, however, remains one of the few consistent areas of optimism. 92 per cent of surveyed chief economists expect AI adoption to increase over the next year. Yet even here, expectations are becoming more measured.
At the start of the year, many economists anticipated rapid productivity gains from AI deployment across industries. That optimism has now cooled somewhat. The latest survey suggests meaningful productivity improvements will likely take longer than previously expected in most sectors.
Only information technology and education maintained relatively stable expectations for near-term AI productivity gains. Industries such as engineering, healthcare, utilities, construction and medical services are now expected to experience much slower AI-driven productivity transformation than initially forecast earlier in the year.
The development reflects growing recognition that large-scale AI integration may be more operationally complex, capital-intensive and uneven than early enthusiasm suggested. Still, AI remains central to long-term corporate investment strategies.
The race to build data centres, digital infrastructure and AI-driven business systems continues to attract massive capital, particularly in the United States and parts of Asia.
For multinational corporations, the global economic map is increasingly being redrawn around resilience, technology capacity, energy security and strategic flexibility. That transformation is altering not only where companies invest, but also how governments compete for capital.
The implication emerging from the World Economic Forum report is that the global economy may be entering a prolonged period where geopolitical fragmentation becomes a permanent structural feature rather than a temporary disruption.
Trade routes are becoming politicised, energy security is increasingly tied to national strategy, supply chains are being regionalised, and businesses are learning to operate within a world where geopolitical shocks can rapidly reshape cost structures, consumer demand and investment flows.
The global economy has experienced periods of uncertainty before. However, the convergence of energy insecurity, inflation risk, geopolitical confrontation, technological disruption and supply-chain fragmentation is now creating a far more complex operating environment than many policymakers anticipated at the start of the year.
The cautious optimism that opened 2026 has faded quickly. In its place is a global economy increasingly shaped by volatility, fragmentation and the growing realisation that the aftershocks of geopolitical conflict may define the economic landscape far longer than markets initially expected.
