EXPLAINER - Why higher oil prices cannot shield Gulf economies from Hormuz shock

• Saudi Arabia, UAE also expected to shrink as production and export disruptions outweigh gains from higher prices
• IMF forecasts point to a strong rebound in 2027, but recovery depends on restored production and trade

Gulf economies are expected to shrink sharply this year as long-term disruptions to energy production and shipping through the Strait of Hormuz outweigh the benefits of higher oil and gas prices, according to the International Monetary Fund’s latest forecasts.

The October World Economic Outlook points to particularly severe declines in economies most exposed to interruptions in hydrocarbon output and transport, with Kuwait, Qatar and Bahrain facing double-digit contractions.

The deterioration highlights a central feature of the regional shock: higher global energy prices offer limited protection when producers cannot maintain production or deliver exports to customers.

The damage also extends beyond hydrocarbons, as weaker trade, higher costs and uncertainty weigh on business activity and complicate efforts to diversify Gulf economies.

Smaller Gulf producers face steepest declines

The IMF projects Kuwait's economy will contract 16.7% in 2026, while Qatar is expected to shrink 15.6% and Bahrain 11.3%, according to published accounts of the October report.

Saudi Arabia and the United Arab Emirates are also forecast to contract, although by smaller margins, reflecting differences in economic structure and exposure to disrupted export routes.

Saudi Arabia's economy is projected to shrink 3.3% this year, a sharp reversal from the 1.7% growth forecast in July. The change represents a five-percentage-point downgrade in just three months.

The IMF expects Saudi growth to rebound to 7.9% in 2027, compared with its previous projection of 5.5%, indicating that part of the activity lost this year could return as conditions improve.

The UAE is forecast to contract 3.9% in 2026 before expanding 7.7% next year. Outside the six-member Gulf Cooperation Council, Iraq faces a projected 16% contraction, underlining the broader exposure of regional energy exporters to the disruption.

These figures are projections for annual real economic output, rather than confirmed full-year outcomes, and remain sensitive to the course of the conflict and the restoration of trade.

Outlook deteriorates as disruption persists

The new forecasts mark a substantial deterioration from the IMF's spring assessment.

In April, the fund still projected 2% growth for the Gulf Cooperation Council as a whole in 2026. Its country forecasts included contractions of 8.6% for Qatar, 0.6% for Kuwait and 0.5% for Bahrain.

That earlier outlook assumed a relatively short-lived conflict, with trade resuming and production normalizing by the middle of the year.

The persistence of disruption has therefore undermined a central assumption behind the earlier projections, leaving economies exposed to a longer period of reduced output and impaired logistics.

The geographical differences are important. In its April regional briefing, the IMF highlighted that Oman faced a more limited downgrade because its access to the sea lies outside the Strait of Hormuz.

That distinction illustrates why the availability of alternative export routes can influence economic outcomes alongside the size of financial reserves or the level of global oil prices.

Higher prices cannot replace lost production

IMF Managing Director Kristalina Georgieva warned Gulf finance ministers and central bank governors on Oct. 1 that the regional economy was expected to contract as hydrocarbon production fell sharply and growth outside the sector slowed.

She identified the near closure of Hormuz, disruption in the Red Sea and damage to energy facilities as constraints on exports and production capacity.

Reduced trade, weaker business confidence and rising prices for essential goods were also restricting non-hydrocarbon activity, she said.

For energy producers, the distinction between prices and volumes is critical. A higher price per barrel can support receipts from the oil that is sold, but it does not restore barrels that cannot be produced or shipped.

Real GDP measures production after accounting for price changes. Consequently, an increase in export prices does not automatically prevent an economy from contracting when physical output falls.

This also helps explain why an energy shock can simultaneously raise import costs elsewhere and reduce economic activity in the countries supplying those commodities.

Strong rebound would not erase every loss

The IMF's projections envisage substantial recoveries in several of the hardest-hit economies next year as production, exports and logistics normalize.

Qatar is forecast to grow 18.8% in 2027, Kuwait 17.1% and Bahrain 13.9%. The broader Middle East and Central Asia region is projected to expand 6.3% after contracting 0.3% this year.

However, large percentage rebounds partly reflect the lower starting point created by this year's contractions.

Applying the projected annual changes illustrates the distinction. Kuwait's output would fall from an index of 100 in 2025 to 83.3 in 2026, then recover to approximately 97.5 in 2027. It would therefore remain about 2.5% below its 2025 level despite double-digit growth.

Qatar's projected contraction and rebound would bring output approximately back to its 2025 level. Neither calculation captures the additional production that might have occurred had the disruption never happened.

Financial buffers and logistics shape resilience

Georgieva said government measures and investment in energy and logistics infrastructure had helped contain the wider fallout, including through rerouting supplies and supporting firms and banks.

She nevertheless stressed that financial buffers cannot substitute for physical resilience to trade shocks.

The IMF has highlighted the potential for the GCC Railway and Saudi Landbridge projects to reduce losses from a Hormuz closure by improving alternative transport connections.

Its policy advice calls for temporary, targeted support where needed, while avoiding broad stimulus when the principal constraint is disrupted supply.

As conditions normalize, the fund recommends rebuilding financial buffers and maintaining investment in diversification and economic security.