The global economy is on course for its weakest expansion since the onset of the Covid-19 pandemic, the World Bank has warned, as the widening conflict in the Middle East drives up energy prices, stokes inflation and lifts borrowing costs across the developing world. In its latest Global Economic Prospects report, viewed from Washington as a sharp corrective to earlier optimism, the Bank projects worldwide growth of just 2.5% in 2026, down from 2.9% this year, with forecasts for two-thirds of economies downgraded since January. Should energy supply disruption intensify and financial pressures mount, the report cautions, global output could slump as low as 1.3%. The toll is most acute among energy-exporting states in the Gulf, with the United Arab Emirates and Iraq among the hardest hit, while developing economies outside China and India are collectively on track for nearly a decade of no progress in narrowing income gaps with advanced nations.

Viewed from Jakarta, the strain is manifest in a widening fiscal deficit. The World Bank’s Indonesia Economic Prospects report, released in parallel, projects the budget shortfall will hold at 2.8% of GDP through 2027, dipping only marginally to 2.7% in 2028, weighed down by heavy energy subsidy bills and the cost of flagship national programmes. In a striking early-year development, the deficit for the first quarter of 2026 surged to Rp240.1 trillion, or 0.93% of GDP, a record for the period. Officials at the state-backed investment vehicle Danantara have moved to frame this not as a loss of control but as a deliberate, “by design” recalibration of the spending cycle, shifting outlays from the traditional year-end rush to the beginning of the fiscal year. The strategy appears to have boosted near-term activity: the Bank revised up its 2026 growth forecast for Indonesia to 5.0%, from 4.7% in April, crediting the front-loaded public expenditure and a stronger-than-expected first quarter.

By contrast, analysts in New Delhi point to a notable decoupling. India’s economy expanded by 7.8% year-on-year in the three months to March, well above market expectations of 7.2%, even as the Middle East conflagration tightened its grip. The performance was buttressed by a landmark trade agreement with the European Union and a series of favourable rulings in Washington that slashed U.S. tariffs on Indian exports from 50% to just 10%. While the outbreak of the Iran conflict has since clouded the outlook, India’s ability to sustain momentum amid global turmoil underscores the uneven distribution of the current shock.

Looking ahead, the world economy’s trajectory remains precariously dependent on the course of the Middle East conflict and on the capacity of major developing economies to manage fiscal buffers that are already stretched. The World Bank sees global growth edging up to 2.8% in 2027, still well below the average of the 2010s. For policymakers from Southeast Asia to the Gulf, the challenge is to maintain productive public investment while insulating budgets from energy-price volatility — a balancing act that is likely to define the rest of the decade.