According to a report by the Washington-based Institute of International Finance (IIF), the UAE economy is projected to experience a minor contraction of roughly 0.4% in 2026 due to the economic fallout of the conflict with Iran, reversing a strong growth rate of 5.3% in the prior year. This dip in the Arab world’s second-largest economy is primarily driven by an 8.2% decline in oil sector GDP following Iran’s closure of the strategic Strait of Hormuz, which severely choked off maritime crude and gas exports during March and April. While non-hydrocarbon sector growth is also expected to decelerate, the IIF emphasizes that the UAE’s massive fiscal and financial reserves give the government ample room to sustain public spending, provide liquidity, and shore up confidence across the domestic banking system.
The economic downturn is expected to be brief. The IIF forecasts a sharp economic recovery, with GDP projected to bounce back by 5.2% in 2027 and 6% in 2028. This resurgence will be fueled by improving regional stability, a recovery in trade and tourism, renewed foreign capital inflows, and a dramatic expansion in energy output. During the peak of the blockade, the UAE relied heavily on its Abu Dhabi-to-Fujairah pipeline to bypass the Strait of Hormuz by routing supplies directly to the Gulf of Oman. In response to the vulnerability, the Abu Dhabi National Oil Company (ADNOC) is fast-tracking a second West-East pipeline to Fujairah. Scheduled to go online next year, this infrastructure will allow the UAE to double its bypass export capacity.
Following its strategic exit from OPEC, the UAE—which holds over 100 billion barrels of proven oil reserves—is targeting a crude production capacity of 5 million barrels per day. Jamal Banoon, head of the Riyadh-based SMS economic consulting center, noted that this surge in crude extraction will also unlock higher volumes of associated natural gas, boosting both domestic energy security and national export revenues. These long-term infrastructure plays are expected to solidify Abu Dhabi’s role as the country’s central economic anchor.
Despite the optimistic multi-year outlook, risks remain on the horizon. Total capital inflows into the UAE are expected to dip from $124 billion in 2025 to $109 billion in 2026, before rising to $116 billion in 2027. The IIF warns that a downside scenario involving prolonged Iranian attacks or extended maritime disruptions could choke off hydrocarbon revenues, flatten non-hydrocarbon growth below 1%, and severely weaken private investment. Ultimately, the report concludes that while the conflict has exposed vulnerabilities and increased defense and operational costs, the UAE’s core long-term growth narrative remains firmly intact.
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