Gulf economies risk worst slump since 1990s if Iran war drags on

The US-Israeli war on Iran could push several Gulf economies into their worst downturn since the early 1990s if the conflict continues and disruption in the Strait of Hormuz persists, according to Bloomberg.

Citing Goldman Sachs economist Farouk Soussa, Bloomberg said Qatar and Kuwait could each see gross domestic product shrink by 14 per cent this year if the war continues through the end of April and results in a two-month effective halt to oil and gas flows through Hormuz.

Such a collapse would mark the sharpest hit to those economies since the turmoil triggered by Iraq’s invasion of Kuwait and the Gulf War

Saudi Arabia and the United Arab Emirates would be in a stronger position because they can reroute part of their oil exports away from the strait, but they would still face serious damage.

Bloomberg reported that Saudi Arabia’s GDP could fall by about 3 per cent and the UAE’s by about 5 per cent, making it the biggest economic blow to both countries since the pandemic.

“For many Gulf economies, the war could have a bigger near-term impact than Covid,” Soussa told Bloomberg, warning that while states may eventually rebuild, the longer-term damage to confidence remains unclear.

Read: Standing between missiles and diplomacy: The Gulf’s difficult path to prevent a regional war

The report underlines how the war has created a crisis for Gulf states, which face damage to both their hydrocarbon revenues and their non-oil sectors. Brent crude has climbed above $100 a barrel amid the disruption, while gas markets have also been shaken by the collapse in Qatari LNG exports.

Bahrain has already started cutting output at its aluminium smelter in part because of the Hormuz stoppage.

While higher oil prices may cushion some of the blow for Saudi Arabia and the UAE, economists cited in the Bloomberg report said the broader pain could spread across real estate, tourism, investment and other non-oil sectors as regional instability deepens.

Saudi Arabia may fare better than some of its neighbours if it continues to shield its territory and keep business activity running, but even there the kingdom faces the risk of a deeper fiscal deficit in the near term.

The Strait of Hormuz handles a major share of the world’s oil and LNG trade, making any prolonged disruption a direct threat not only to Gulf producers but to the global economy.