TWN Info Service on UN Sustainable Development (May26/01)
21 May 2026
Third World Network

UN: Hormuz crisis derails recovery, exposes global economy to new shocks
Published in SUNS #10448 dated 21 May 2026 

Penang, 20 May (Kanaga Raja) -- The global economy entered 2026 on a stronger footing, buoyed by robust trade, rising industrial output in developing economies and artificial intelligence (AI)-driven investment.

However, the outlook deteriorated sharply after the escalation of Middle East tensions in late February disrupted energy markets, tightened financial conditions and choked key shipping routes, including in the Strait of Hormuz, a critical route for global oil and gas trade.

This is one of the main conclusions highlighted by UN Trade and Development (UNCTAD) in an update to its Trade and Development Report 2025, titled "Trade and Development Foresights 2026: Global economy faces a geopolitical challenge."

The report now warns that mounting uncertainty is weighing on trade, investment and supply chains, with world merchandise trade growth projected to slow steeply from 4.7% in 2025 to between 1.5% and 2.5% in real terms in 2026.

According to the report, buoyed by dynamism in trade and technology sectors, the global economy grew 2.9 per cent in 2025, entering 2026 on a firm footing. The resilience in global growth reflected robust industrial output in developing countries, which outpaced that of developed economies.

"Technology-driven manufacturing, particularly related to artificial intelligence (AI), played a key role in this dynamic, most notably in Asia."

However, the report said since the end of February 2026, the recovery has faced a set of disruptions stemming from the military escalation in the Middle East.

In the near-term, the economic consequences of the conflict centre on energy markets and shipping routes, it added.

However, it said in the longer run, a protracted escalation is likely to entail system-wide effects on international trade, food systems, financial markets - with global stocks and bonds experiencing in March 2026 their biggest combined sell-off since 2022.

The report identified two specific conditions characterizing the current juncture in the global economy.

First, it said whereas 2025 was shaped by trade policy uncertainty, early 2026 has been dominated by heightened geopolitical risks.

"These tensions trigger additional transmission mechanisms within a global economy marked by evolving trade- finance interdependencies."

Second, the ongoing conflict adds to global structural weaknesses. It intensifies the longer-term trend of rising conflicts globally, many of which undermine the growth prospects of developing countries.

In this regard, UNCTAD highlighted three specific concerns:

* From an economic fundamentals perspective, the worsening fragilities linked to slower growth, increasing inequality, and rising costs of living threaten development prospects.

* Mounting uncertainties affect global investment, with developing countries facing a renewed risk of financial outflows and souring investor sentiment;

* A protracted escalation raises the likelihood of deeper disruptions in global trade and finance, potentially, foreshadowing a cascading crisis.

TURBULENT TIMES

In early March 2026, the outbreak of the conflict in the Middle East has affected the global economy through sharp swings in international energy prices, with oil surging more than 60 per cent and gas more than doubling in a matter of days, the report said.

It said more than two months into the distortions, volatility in key markets, including bond, equity and currency markets, remained high, particularly for developing countries.

Higher energy prices increase macroeconomic pressures, with varying impacts on oil exporters and importers, it noted.

According to the report, while in the short run net oil exporters stand to gain from higher oil revenues, consumers are sensitive to increases in gasoline prices.

It said even moderate price rises could therefore undermine consumption and lead to a slowdown in the country's merchandise imports, with adverse consequences for trading partners.

The European Union, as a net importer of oil, will face a higher oil import bill. While demand for fuels in the region has become more elastic since 2022, making the displacement of other import segments less likely, the energy shock confronts Europe as it prepares for the 2026/2027 heating season, raising the potential of sustained price increases.

Developing countries face more serious consequences, as their energy imports are more inelastic, particularly for those with significant imports of fuels, food and fertilizers, the report cautioned.

A notable exception is China, whose oil reserves appear able to withstand a short-lived increase in international prices.

Yet, many developing countries will likely face a higher energy import bill in 2026 while facing softer import demand. Even in economies that benefit from significant oil exports, more expensive imports of fuels, food and fertilizers will offset the extra revenues, the report suggested.

Amid instability in currency and financial markets, this will complicate the management of external accounts and monetary and fiscal policies, adding to food security challenges in the most vulnerable economies, it stressed.

It said that as of early April 2026, numerous developing countries, including Bangladesh, Brazil, Egypt, Ethiopia, India, Indonesia, Mexico, Pakistan, Panama, Philippines, Sri Lanka, Thailand and Viet Nam, have implemented various measures to stretch supply, to increase fuel subsidies (at significant fiscal cost) or to cap prices.

It said as the economic outlook continues to rest on geopolitical uncertainties, the global economy is expected to grow 2.6 per cent in 2026, 0.3 percentage points lower than in 2025, while a more negative scenario of a deeper macroeconomic impact from a prolonged conflict cannot be dismissed.

SEARCH FOR SAFETY

The outbreak of the conflict has triggered a search for safe financial assets amid increasing uncertainty. Notably, instead of directing funds into long-term sovereign bonds of the major developed countries - traditionally viewed as "safe havens"- investors appear to demand higher yields for holding these bonds, despite growing demand for dollars, said the report.

Consequently, long-term sovereign bond yields have increased, while the dollar has strengthened. For its part, the price of gold has declined since the outbreak of the conflict, it noted.

As is typical during periods of heightened uncertainty, global investors withdrew from assets perceived as riskier.

While many developing countries proved attractive to international investors in 2025, they now face a renewed threat of capital outflows as investors seek safety amid geopolitical uncertainties, it underlined.

Notably, the report said across all developing countries, the depreciation was widespread, though less severe for frontier-market economies (FMEs) than for emerging-market economies (EMEs).

UNCTAD explained that the differing trajectories respond to a large degree to greater financial integration and predominance of floating-rate regimes among EMEs, whereas managed exchange rate regimes continue to be the norm in FMEs.

In developing regions, currencies depreciated the most in the Americas, followed by Africa and Asia, it said.

According to the report, these differences reflect a variety of factors, including the magnitude of the appreciation prior to the conflict, the exchange rate regime, debt sustainability risks, and the share of non-resident investors in the domestic capital markets, which increased more in countries that received larger portfolio investments during the boom phase from May 2025 to February 2026.

Furthermore, the start of the Middle East conflict triggered a sell-off of developing countries' assets, with equity markets of emerging markets sliding by more than 12 per cent between 28 February and 29 March.

"While the ceasefire declared on 8 April 2026 offers a hope of recovery, volatility remains high, especially in developing countries."

In this context of heightened risks, external sovereign bond yields of EMEs and FMEs increased, reversing the downward trend that began in May 2025, said the report.

Domestic sovereign bond yields surged, reflecting non-resident portfolio outflows and expectations of tighter monetary policy to tame inflationary pressures from higher energy prices, it added.

It cautioned that in a scenario of a prolonged conflict, global financial conditions are likely to deteriorate further, potentially triggering an accelerated flight to quality and a large-scale sell-off of developing countries' currencies and assets.

"In this scenario, FMEs are particularly vulnerable to portfolio outflows, as their domestic capital markets are shallower and less liquid. These factors typically amplify the effects of foreign investors' sell-offs."

GLOBAL TRADE

The report also said world merchandise trade started 2026 on a strong footing. Yet, fragile aggregate demand, compounded by persistent uncertainties and new geopolitical risks, suggests that the momentum observed in 2025 and early 2026 will fade as the year progresses.

Early customs data indicates robust numbers on the back of solid containerized flows from key Asian and trans-Pacific routes, it noted.

More broadly, it said Chinese exports expanded more than 20 per cent in dollar terms in January-February 2026 compared to the same period a year earlier.

Globally, international air cargo grew 7.2 per cent in January and 11.6 per cent in February in real terms, year-on-year, while global seaborne cargo expanded 5.3 per cent amid double-digit growth rates from some specific segments such as cars, grain and liquefied natural gas (LNG).

Significantly, global manufacturing purchasing managers' index (PMI) - especially two of its components that matter the most for merchandise trade - reached their highest level since 2021.

Quantitatively, the "output" sub-index climbed to 53.1, while "export orders" reached 51.4, marking the first expansion since 2024.

In short, the report concluded that merchandise trade flows have notably improved across major economies over the last quarters.

However, the recent expansion has been relatively concentrated on specific products, particularly AI-related goods like servers, high-performance computing equipment, semiconductors, and components associated with service automation and data centre investment, it said.

Such categories often recorded double or even triple-digit year-on-year growth in East Asia, Northern America, and parts of Europe.

In particular, "automatic data processing machines" contributed about three-quarters of the 4-per cent nominal growth of total imports of the United States in 2025.

In China, the strong contribution of products in this category almost offset the decline registered by all other imported products in 2025.

The dynamism of AI-related products contrasts with more traditional sectors - such as basic consumer goods, textiles, and some intermediate inputs - which recorded modest gains. Commodity-linked trade, for instance, remained subdued through late February, said the report.

It said capital goods outside the digital technology sphere have also shown uneven momentum, reflecting soft investment cycles in several developing countries.

Amid continued trade policy volatility, several large economies have become more proactive in regional or sectoral trade initiatives, said the report.

In this regard, it cited two specific policy announcements that are important for Africa's export prospects: first being recent legislation in the United States re-authorizing the African Growth and Opportunity Act (AGOA) trade preference programme through 31 December 2026, with retroactive effect to 30 September 2025, and the second being China's announcement that it would remove tariffs on goods from 53 African countries starting in May 2026.

At the same time, these developments are overshadowed by the negative spillover effects of geopolitical tensions in the Middle East, which have begun to impact many African economies, it added.

In particular, the report said the disruptions in the Strait of Hormuz have induced a significant negative shock to trade and maritime transport.

It said due to their heavy reliance on Gulf exports, crude and LNG carriers have faced the strongest impact, with reduced volumes and higher risk premia, prompting a sharp increase of energy prices worldwide.

While container shipping faces fewer direct risks from the conflict than other maritime sectors, it is not insulated from disruptions or rising costs. Similarly, the dry bulk market has remained more insulated, facing only indirect operational and insurance pressures.

The relative resilience of merchandise trade in 2025-early 2026 is being tested by the impact of the conflict in the Middle East, the report emphasized.

It said considering a deceleration of global aggregate demand and a likely reversion of the boom in artificial intelligence - growth of world merchandise trade, in real terms, is expected to slow from 4.7 per cent in 2025 to 1.5-2.5 per cent in 2026, even if current estimates for the year 2026 carry wide uncertainty bands.

"Beyond 2026, rising geopolitical tensions are likely to accelerate the re-configuration of global merchandise trade, the contours of which are starting to emerge."

But for now, the report said that firms and governments will need to accommodate a more volatile landscape. +