Gulf economies are feeling the brunt of the Iran war as the risk of recession looms US-Israel war over Iran news

As the economic fallout from the United States and Israel’s war with Iran reverberates around the world, the economies of the Gulf are suffering some of the worst damage.

Iran has launched a series of attacks on Gulf states since the conflict began on February 28, arguing that they were attacking military bases used by the US for war. Gulf states have rejected Tehran’s claims, insisting the attacks on them are unjustified.

Iranian strikes have increased energy production and caused major disruptions to tourism and travel, leaving the region at risk of the most severe economic damage since the 1990-1991 Gulf War.

“Disruptions to aviation, tourism, shipping lines and fuel exports, combined with higher insurance premiums and freight costs, could mean the region loses hundreds of millions of dollars a day in economic activity,” said Khaled Almezaini, assistant professor of politics and international relations at Zayed University in Dubai, United Arab Emirates.

“The exact amount depends on how long trade routes, ports and airspace are disrupted.”

After two weeks of war, the economic impact on the region is already considerable.

According to Rystad Energy, daily output from Middle Eastern oil producers has fallen from 21 million barrels to 14 million barrels as it deals with the closure of the Strait of Hormuz.

Production is expected to drop significantly if commercial shipping continues to avoid the strait due to Tehran’s threats. Rystad Energy predicted a drop to 6 million barrels per day in a worst-case scenario.

While US President Donald Trump said “several” countries are ready to help Washington secure the waterway with their navies, no government has yet confirmed its involvement but several have ruled out deploying warships for the effort.

Despite significant economic diversification in recent decades, members of the Gulf Cooperation Council – Qatar, Kuwait, Bahrain, Saudi Arabia, the UAE and Oman – still rely on oil production for about a quarter of their gross domestic products (GDP).

Qatar, Kuwait and Bahrain are particularly exposed to obstacles due to limited access to export routes, said Yasser Al-Maliki, Gulf analyst at the Middle East Economic Survey (MEES).

“Saudi Arabia and the UAE are in a slightly better position because both have invested in infrastructure that allows them to partially bypass the strait,” Al-Maliki said, pointing to Saudi Arabia’s East-West Pipeline and the UAE’s pipeline to Fujairah, which carries about 5 million barrels a day.

Goldman Sachs estimates that Qatar and Kuwait could see their GDPs fall by 14 percent if the war continues until the end of April, with the UAE and Saudi Arabia facing a contraction of 5 percent and 3 percent respectively.

At the same time, however, S&P Global Ratings, a leading rating agency, affirmed a “stable outlook” for Qatar, saying the country’s “large fiscal buffers should enable sufficient fiscal and external space to offset the effects of adverse geopolitical developments,” including temporary disruptions in LNG production and liquefied gas.

Meanwhile, Capital Economics has suggested that GDPs in the region could fall by 10 to 15 percent if the conflict lasts at least three months and causes permanent damage to energy infrastructure.

Iraq, which borders the Gulf but is not a member of the GCC, has also been hit hard by the energy crisis.

Peter Martin, head of economics at Wood Mackenzie, said the Iraqi government is losing about $3 billion in daily revenue based on an estimated 70 percent drop in petroleum production.

“The duration of the production restriction is important for economic impact but highly uncertain,” Martin said.

“Assuming that Iraq experiences a 10 percent year-on-year decline in oil production in 2026, we estimate that GDP could shrink by 3.5 percent this year.”

While energy remains the Gulf’s economic lifeline, the battle has spread to other critical sectors, particularly tourism and travel, a growth sector that accounts for about 11 percent of the GCC’s GDP.

Airspace closures and restrictions led to 37,000 flight cancellations from February 28 to March 8, according to aviation analytics firm Cerium.

On Tuesday, UAE officials briefly instituted a complete closure of the country’s airspace, citing “rapidly evolving regional security developments”.

The announcement came a day after Dubai International Airport, normally the world’s busiest international gateway, was forced to ground flights following a drone attack on a nearby fuel depot. Qatar Airways, meanwhile, has slowly launched special flights and is increasing their frequency, although none of the Gulf carriers have reached pre-war aviation traffic levels.

In an analysis published last week, the World Travel and Tourism Council estimated that the conflict is costing the region $600m in daily spending by international visitors.

“Having to cancel most tourist bookings, conferences, sporting events, etc. for a fortnight now represents a huge cost to the region’s travel sectors and hotels and hospitality sectors,” said Emily Rutledge, an economics lecturer at the Open University in the United Kingdom.

“How many tens of thousands of Europeans and Asians would have flown through Doha, Dubai and Abu Dhabi in the last 15 days if not for America and Israel’s war on Iran?” Rutledge said.

Al-Maliki, an analyst at MEES, said the economic fallout could be compared to historical regional crises if the war drags on.

“In the near term, the scale of the disruption is similar to the economic shock experienced during the pandemic, but a sustained shutdown could reach the scale of the economic collapse seen during the 1991 Gulf War,” he said.

Zayed University’s Almezaini said he sees a Gulf-wide recession as unlikely, pointing to the vast fiscal reserves many countries can turn to to withstand short-term shocks.

While the risk of a downturn increases if the war drags on for weeks, Almezaini said, “the more likely base case is weak growth and a delayed recovery rather than a broad, deep contraction, especially for large economies like the UAE and Saudi Arabia.”

“While tensions escalated relatively quickly, the region was primed for terrorist activity faster than many expected,” he said.