Gulf Economic Resilience Tested by US and Israeli Conflict with Iran
Despite major threats to their economic wellbeing caused by the military conflict between the United States, Israel, and Iran, the Gulf states have successfully preserved their financial stability. An economy’s capacity to absorb, withstand, adjust to, and bounce back from external shocks defines its economic resilience, and the conflict with Iran has presented an unprecedented trial for this regional capability.
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The conflict has triggered the closure of the Strait of Hormuz, disrupting both export and import supply chains and endangering business continuity, food security, and hydrocarbon revenues. Additionally, Iranian targeting of civilian infrastructure has threatened the provision of essential public services across the region. Despite these pressures, the Gulf states have exhibited substantial short-term absorptive capacity, backed by effective state institutions, a commitment to business continuity, coordination among members of the Gulf Cooperation Council (GCC), and effective air defences.
Infrastructure Protection and Supply Chain Adaptation
Electricity and water services across the Gulf have experienced little disruption, while widespread food shortages have been avoided despite heavy reliance on imports. Iranian strikes on critical infrastructure threatened desalinated water and electricity availability, but water supplies remained uninterrupted. Missile and uncrewed aerial vehicle attacks on power-generation facilities in Bahrain, Kuwait, and the United Arab Emirates resulted in only limited power outages in Bahrain and Kuwait, while electricity supply remained uninterrupted in the UAE.
Gulf-based businesses have adapted to the closure of airspace and maritime routes by rerouting goods overland via ports along the Gulf of Oman and the Red Sea. Saudi Arabia and the UAE expanded the use of cargo trains, while Bahrain and Kuwait mobilized overland links with Saudi Arabia. Air freight has also served as a key strategy to mitigate supply-chain disruptions, and businesses have adjusted operations by offering unpaid annual leave and reducing salaries instead of executing staff layoffs.
Long-Term Sustainability Concerns
The short-term adaptation strategies deployed by businesses and governments are not designed for long-term endurance. Absorbing heightened operational expenses, implementing salary reductions, and operating on a smaller scale are unlikely to remain sustainable if the conflict is prolonged. Furthermore, keeping local markets well-supplied with food has underscored the region’s heavy dependency on imported food and the Strait of Hormuz as a critical choke point.