The European Bank for Reconstruction and Development (EBRD) has lowered its economic growth projections amid the ongoing conflict in the Middle East, citing a significant energy shock that is severely impacting Iraq’s oil-dependent economy. The institution now anticipates overall growth across its regions to slow to 2.5% in 2026, a reduction from the previously forecasted 3.4% for 2025. This revision represents a 0.6 percentage point decrease compared to its June outlook.

The downward adjustment is largely attributed to a sharp decline in Iraq’s economic prospects. The country’s economy is expected to shrink by 12% this year, with the possibility of further contraction if disruptions to its oil exports continue. These export challenges stem from the closure of the Strait of Hormuz, a crucial shipping route for global oil supply, which has been effectively blocked since the escalation of hostilities between the United States and Iran in late February.

Beata Javorcik, the EBRD’s chief economist, highlighted that the primary issue facing Iraq is the interruption of its oil exports, which constitutes a major source of revenue for the country. The ongoing conflict and resulting export disruptions have therefore created significant uncertainty over Iraq’s economic stability.

The EBRD, originally established to support former Soviet bloc countries in transitioning to market-based economies, has expanded its operational scope to include regions in the Middle East and Africa. This broadened mandate places the bank in a key position to monitor the broader economic repercussions of geopolitical turmoil in energy-producing regions.

The latest forecasts underscore the interconnected nature of geopolitical events and global economic performance, particularly in economies heavily reliant on energy exports. The EBRD’s cautionary outlook reflects concerns over prolonged conflict potentially exacerbating economic instability not only in Iraq but also across wider regional markets.