Middle East Economy Watch - May 2026
This edition of the Middle East Economy Watch examines how the disruption to oil exports, trade and supply chains due to the ongoing regional conflict is reshaping the GCC outlook. As governments and businesses move quickly to keep energy, goods and capital flowing, the next priority is to rebuild with confidence through policy measures that build resilience, diversify trade routes, support liquidity and reduce exposure to future shocks.
The Middle East conflict and subsequent disruption in the Strait of Hormuz have triggered one of the most severe energy supply shocks in recent history, disrupting global supply chains and adding uncertainty to regional trade.
The impact across the GCC has been uneven. Some economies face greater near-term pressure where trade, logistics or fiscal space are constrained, while others are better positioned to absorb shocks, supported by lower direct exposure to the conflict, alternative export routes or stronger fiscal buffers.
The current crisis presents new challenges. Although a ceasefire is in place, the path to a durable resolution remains uncertain. At the same time, the GCC has remained resilient, with governments and businesses adapting quickly through commercial, financial and policy measures. This edition looks at how the region is recovering from the initial shocks of the conflict, and what further steps could strengthen confidence, rebuild capacity and reduce exposure to future disruption.
The impact of the Middle East conflict on GCC economies extends beyond disruption to maritime trade and damage to physical assets. Wider supply chains have come under pressure as tankers and container routes are adjusted, increasing transit times and logistics costs. Air traffic disruption around key GCC hubs has also affected visitor flows, while damage to critical infrastructure and industrial activity in some parts of the region has weighed on short-term growth prospects – softening near-term confidence in consumption and investment.
Given the limited data available at the time of publication, the full economic impact remains difficult to assess. Saudi Arabia’s early GDP estimate for Q1 2026 showed annual growth of 2.8%, but output contracted by 1.5% from the previous quarter, driven by a 7.2% decline in oil sector activity.1 Further data will emerge in the coming weeks and months. What is already clear, however, is that hydrocarbon production has fallen sharply, with knock-on effects for downstream industries that rely on hydrocarbons for feedstock or power. Some facilities have sustained significant damage in the region, with repair timelines ranging from weeks to years, while others have paused production as a precaution against further disruption.
As restrictions on energy exports intensified and transit through the Strait of Hormuz was nearly halted, several economies have had to reduce production as oil storage capacity approached its limits. The impact has been most severe for Iraq, Kuwait, Qatar and Bahrain, which depend heavily on the Strait of Hormuz corridor for most, or all, of their hydrocarbon exports. Saudi Arabia and the United Arab Emirates (UAE) have been less severely affected because they have capacity to export from ports outside the Strait, while Oman’s production and export routes sit outside this crucial chokepoint.
Crude oil production in April across countries bordering the Strait of Hormuz (see Figure 1), including Iraq and Iran, was around 10m b/d lower than in February – a decline of roughly 40%.2 There were also notable declines in the production of gas and associated products with LNG facilities in the region being affected and a full restoration not expected until at least the end of August.3
As a result of the conflict, the March and April readings of the Purchasing Managers’ Indices (PMIs) for the four GCC economies covered by S&P Global have recorded a weakening in non-oil sector activity, although to varying extents.4 The UAE has remained above 50, estimated as the breakeven line between economic expansion and contraction, while Saudi Arabia rebounded to above this threshold in April, although still remaining well below its pre-war level. The variability may reflect differential economic impacts but may also be partly related to timing differences between when the surveys were completed in each country.
A similar pattern was seen during COVID-19, when Saudi Arabia reached its PMI low point in March 2020, while Qatar’s lowest reading came later, in May. One important difference compared with 2020 is that in February 2026, all GCC readings were above 50, signalling expansion before the shock, whereas in 2020, most were already signalling contractions even before the pandemic closures began (see Figure 2).
In addition to this early view of how the conflict is affecting the region’s non-oil economy, other economic data will become available in the coming weeks and months. In the meantime, the International Monetary Fund’s (IMF) April World Economic Outlook (see Figure 3) provides a useful cross-country reference point.
The IMF assumes an oil price averaging US$80 in 2026, up sharply from its previous assumption of US$66.6 Higher oil prices may offset lower export volumes for some countries, but the regional picture shows the projected aggregate fiscal deficit at around -1.4% of GDP - wider than previously forecast. Similarly, GDP growth is expected to slow to 1.8% year-on-year, compared with an earlier projection of 4.4%. Still, to put this in perspective, the projected deficit is still smaller than the -2.6% of GDP recorded in 2025, and the 1.5% of GDP estimated in 2023, when OPEC+ voluntary production cuts weighed on oil output.7
Whether this scenario holds will depend largely on the durability of the US-Iran ceasefire and the pace of any negotiated settlement. These projections therefore remain subject to unusually high uncertainty.
Oil market coordination adds a further layer of uncertainty. On 28 April, the UAE announced that it would leave OPEC and OPEC+, effective 1 May 2026, following a review of its production policy.8 The near-term supply effect is likely to be limited while export routes remain constrained. Over time, however, greater production flexibility by a major producer could influence expectations for oil prices and available energy supplies once shipping conditions normalise.
GCC economies have proven to be resilient in recovering from past crises. Governments and businesses are taking measures to reduce the immediate economic impact and preserve the conditions for recovery.
One way this adaptation is taking shape is through the reconfiguration of supply chains. Goods bound for GCC cities on the Gulf are being rerouted overland from Gulf of Oman ports and from Red Sea ports. Saudi Arabia has increased cargo train frequency and established new intra-GCC shipping routes linking Dammam with Abu Dhabi and Sharjah.9 Dammam is also absorbing diverted air traffic, handling cargo and passenger flights for both Kuwait Airways and Gulf Air, given the suspension of commercial operations at Kuwait and Bahrain airports. Some high-value goods have been moving in the opposite direction, with Bahrain trucking aluminium through Saudi Arabia.
These adaptations are helping maintain essential supplies and keep supermarkets stocked, but these carries time, cost and capacity constraints. Trucking cargo 1,500km across Saudi Arabia to Jeddah is expensive and constrained by limited capacity, while Red Sea ports, particularly Jeddah, are facing mounting capacity constraints from increased demand.10
The broader rerouting challenge was illustrated by a media report on timber shipments from Austria to Qatar, which were redirected through the UAE by land from Khor Fakkan to Jebel Ali before onward transfer to Qatar, with surcharges tripling the total transport cost.11
The hospitality and retail sectors have been affected by the fall in visitor numbers and lower consumer spending. However, some creative initiatives are underway to mitigate the impact. For example, Abu Dhabi’s Zayed International Airport has launched a pass allowing non-passengers to access airside retail and dining facilities.12 Dubai has also deferred payments of hotel and tourism fees for three months, alongside selected government service fees, to support the tourism sector and wider business community.13
At the time of writing, Dubai’s stimulus package, valued at Dh1bn (US$272m), is one of the earliest fiscal policy initiatives so far to ease pressure on companies facing tighter liquidity and rising operating costs.14 Bahrain has drawn on public unemployment funds to pay $249m in April salaries for Bahraini workers in the private sector. Further fiscal measures may be introduced if the conflict becomes more prolonged.15
Financial authorities are also working to mitigate liquidity challenges. Central banks in Bahrain, Kuwait, Qatar and the UAE have announced measures to increase market liquidity and ease capital requirements. These include easing macroprudential ratios and allowing banks to defer some customer loan payments, without classifying those loans as being underperforming, as happened during COVID-19. Liquidity measures also include unlimited repurchase (“repo”) windows, to mitigate concerns about cash shortages if deposit withdrawals increase (see table below).
Central bank policy responses 16 17 18 19
There have also been efforts to support liquidity at the national level, notably the US$5.4bn currency swap agreement between the UAE and Bahrain20 and reported requests by several GCC states for currency swap lines with the US Treasury.21 GCC states have also raised around US$10bn in private placements with bond investors to increase short-term cash flow during the war.22
Other government policy interventions have included engagement with suppliers to ensure reliable stocks of essential goods and stable pricing. The UAE Ministry of Economy and Tourism formed an emergency team with local economic departments to monitor stocks and respond to complaints about possible irregular price increases.23
The immediate response to the Middle East conflict has focused on adaptation: keeping goods, energy and capital moving, supporting liquidity and cushioning exposed sectors. The longer-term task for GCC economies is to reduce exposure to future shocks by diversifying trade and energy routes, strengthening critical infrastructure and implementing policies that support stability and growth in more volatile conditions. This makes trade route diversification a central priority, as it reduces dependence on chokepoints and builds resilience into the region’s economic model.
The GCC has navigated major shocks before, from the 2008 global financial crisis to the COVID-19 pandemic in 2020. The policy challenge now is to turn short-term adaptation into lasting resilience across trade, finance, critical infrastructure and business operations, while laying the foundations for future growth.
The same resilience priorities also apply at company level. For businesses operating in the GCC, five actions are likely to have the highest near-term value.
