Gulf’s economic model faces its biggest test yet

For decades, the Gulf’s economic success has rested on one powerful promise: that the region is safe, stable and open for business. But six months into a devastating regional war, that promise is facing its biggest test yet. Ships are being held up at sea, ports are slowing, tourism is taking a hit, oil and gas facilities are coming under attack, and global investors are beginning to reassess where they can safely park their money.

As Kamran Khan said in the latest episode of On My Radar, the question now is whether the Gulf’s reputation as one of the world’s safest and fastest-growing economic regions can survive a prolonged conflict.

The war involving the United States, Israel and Iran, which began on February 28, has delivered an economic shock of varying degrees to all six GCC states: Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain and Oman.

After nearly a month of relative calm, fighting between the United States and Iran resumed last week, raising fresh concerns about the conflict spreading further across the region.

Then came another worrying development from Saudi Arabia, where attacks by the Iranian-backed Houthi rebels have intensified.

Two days ago, the Houthis launched what was described as their biggest attack yet, targeting multiple oil facilities across Saudi Arabia, including sites in four cities. The attacks left 73 people injured, according to reported figures.

But the situation is no longer simply a confrontation between Saudi Arabia and the Houthis. It has begun to carry wider regional and strategic consequences.

Last month, Pakistan, Saudi Arabia and Türkiye signed a joint defence agreement in Makkah under which an attack on any one of the three countries would be treated as an attack on all three.

The attacks on Saudi Arabia are therefore testing not only the kingdom’s ability to defend its territory, but also this newly emerging defence partnership and its role in a rapidly changing Middle East.

According to Reuters, Pakistan has conveyed Saudi Arabia’s message to Iran, urging Tehran to persuade the Houthis to stop their attacks on Saudi Arabia.

A senior Iranian official confirmed that Tehran had received the message but reiterated Iran’s position that it does not control the Houthis. However, two Iranian sources told Reuters that Tehran had asked the Houthis last week to attack Saudi Arabia and had promised additional funding and weapons.

Whatever the reality of that relationship, the wider economic impact of the conflict is becoming increasingly difficult to ignore.

Six months of war and instability have put severe pressure on the economic engines of the GCC states.

A Reuters survey of economists in July projected that the economies of Qatar and Kuwait could contract by around 8.1% in 2026, while Bahrain’s economy could shrink by 5.1%. The UAE was also expected to experience a modest contraction.

Saudi Arabia and Oman were the only two Gulf economies for which positive growth was still expected. But even Saudi Arabia’s projected growth has now been reduced to around 1.5%.

In other words, even soaring oil prices have not been enough to fully offset the economic damage.

Brent crude is now trading at around $105 a barrel, roughly 42% higher than in February.

But higher oil prices are of limited benefit if the oil cannot be transported safely. If tankers come under attack, insurance costs surge and shipping companies become reluctant to send vessels through the Strait of Hormuz, the economic advantage of expensive oil begins to disappear.

And this is where the Gulf’s vulnerability becomes particularly clear.

The region’s economies are deeply dependent on the free movement of energy, goods, capital and people. Any prolonged disruption to shipping routes, aviation, tourism or investor confidence can therefore create economic damage that extends far beyond the immediate battlefield.

But there is another side to this story.

Most economic analysts agree that if a durable peace is established and the Strait of Hormuz returns to normal, the UAE could be among the fastest Gulf economies to recover.

There are already signs of international airlines returning and air connectivity improving at Dubai International Airport.

The reasons are not difficult to understand.

The UAE has world-class infrastructure, substantial financial reserves, modern ports, a business-friendly regulatory environment and an economic ecosystem that is already deeply integrated with global investors, businesses and tourists.

That means the UAE may have suffered a major economic shock, but it also has perhaps the strongest capacity within the GCC to absorb that shock and recover quickly once regional stability returns.

And that brings us to the bigger question.

The real issue is no longer simply how many billions of dollars the Gulf economies have lost.

The bigger question is what happens if this war continues for another six months.

Will the economic damage remain temporary and reversible? Or will a prolonged conflict begin to undermine the very assumption on which much of the Gulf’s economic transformation over the past 25 years has been built: that the region is safe, accessible and insulated from the wars around it?

For years, the Gulf sold the world an economic proposition built on three simple ideas.

The Gulf is safe. The Gulf is open. And business in the Gulf is protected from war.

The longer this conflict continues, the harder those assumptions will be to sustain.l