Doi.org/10.52340/eab.2026.18.02.02

This article is devoted to the analysis of trends in the development of the global economy in the context of increasing geopolitical risks. It examines the dynamics of economic output and inflation, as well as the state of public finances and the balance of payments. Particular attention is paid to the current situation in the economy and banking sector of Georgia.
Based on a comparative analysis of international and domestic economic indicators, the article outlines the principal challenges and opportunities facing Georgia and offers conclusions regarding the policy measures required to support sustainable economic growth, financial stability and long-term development in an increasingly complex geopolitical landscape.

Keywords: Global economy, global crisis, geopolitical conflicts, geopolitical risks, GDP growth, inflation, unemployment rate, investment, balance of payments, public finances, budget deficit, public debt.
JEL Codes: E60, F51, F40, G21, O57

Introduction

Both the global economy as a whole and all individual countries are increasingly experiencing the adverse effects of geopolitical conflicts. The war in Ukraine and the situation in the Middle East have, for several years, been constraining global economic growth, fueling inflation and contributing to the widening of global imbalances. The situation is further complicated by the rapid growth of public and corporate debt, the fragmentation of the global economy, disruptions to traditional trade chains and the escalation of sanctions and trade wars. A “black swan” event in 2026 was the sharp escalation of the conflict in the Middle East, including the military confrontation between the United States and Israel on one side and Iran on the other, the blockade of the Strait of Hormuz and the spread of military operations across much of the region. At the same time, there is still no clear prospect for the end of the war in Ukraine; moreover, a further intensification of the conflict and an expansion of military operations cannot be ruled out.

Global Economic Development Trends and Prospects

Under these conditions, forecasts issued by international financial institutions, banks and analysts are becoming increasingly pessimistic, while the scope for improving the situation is becoming ever more limited. According to forecasts by the International Monetary Fund (IMF), global economic growth is expected to reach only 3.1% in 2026 (compared with GDP growth of 3.5% in 2025), while global inflation is projected at 4.4% (IMF, April 2026). This forecast assumes that the conflict involving Iran will be short-lived and that energy prices will increase by only 19% in 2026.
Under an adverse scenario (a prolonged closure of the Strait of Hormuz, further damage to drilling and oil refining infrastructure, a significant increase in energy prices, rising inflation expectations and tighter financial conditions), the global economy, according to IMF forecasts, would grow by only 2.5%, while inflation would rise to 5.4%.
Finally, under an extremely adverse scenario (where disruptions in energy supply persist for a prolonged period and financial conditions continue to tighten), global economic growth in 2027 would amount to only 2%, while inflation would exceed 6% (Gourinchas 2026).
At the same time, despite the impact of common negative factors, the situation regarding economic growth differs significantly across groups of countries and regions.
Thus, the IMF projects that overall economic growth in the group of advanced economies will amount to 1.8% in 2026, slightly below the 2025 figure of 1.9%. Moreover, acceleration of economic growth is expected in the largest advanced economy—the United States—from 2.1% in 2025 to 2.3% in 2026. Positive GDP dynamics in 2026 are also expected in Germany (an acceleration from 0.2% to 0.8%), Finland (from 0.2% to 1%), Slovenia (from 1.1% to 2%), Luxembourg (from 0.6% to 1.6%) and Sweden (from 1.5% to 2%). Despite a significant and sharp increase in fuel prices and other commodity prices, and even the possibility of disruptions in the supply of these goods from the Middle East, no substantial slowdown in economic growth is expected in advanced economies, let alone a recession (a slight decline in GDP is possible only in Liechtenstein and Puerto Rico). At the same time, a number of advanced economies have historically demonstrated weak economic growth, which is evidently linked not only to the negative impact of external factors but also to structural problems within these economies. Weak economic growth—below 1% in 2026—is forecast for the United Kingdom, Japan, France, Italy, Belgium, Austria and Slovakia.
In the group of developing countries and emerging market economies, a more pronounced slowdown in economic growth is expected in 2026: from 4.4% to 3.9%, whereas in 2008–2017 these economies grew at an average annual rate of 5%.
In developing Asian countries, economic growth in 2026 is projected at 4.9% (compared to 5.5% in 2025).
China’s economic growth rate in 2026 is expected to reach 4.4% (compared to 5% in 2025 and 8.3% in 2008–2017). Undoubtedly, trade wars and geopolitical conflicts contribute to the slowdown in China’s economic growth; however, China remains the most dynamically developing giant of the global economy and one of the key geopolitical actors.
Amid the escalation of geopolitical conflicts, India has also managed to maintain high rates of economic growth. In 2025, the country’s GDP grew by 7.6% and in 2026 its growth is expected to slow to 6.5%, which nonetheless remains a very high figure (one of the highest in the world). It appears that pragmatism and a policy of diversification of economic relations play an important role in these economic achievements.
In 2026, the IMF forecasts that Eastern European emerging market economies will maintain their current growth rates at around 2%. Risks for these countries arising from the escalation of military conflicts, particularly in the Middle East, certainly exist. As noted in the report of the European Bank for Reconstruction and Development titled as Potential Economic Impact of the Middle East Conflict, geopolitical tensions are transmitted through commodity markets, supply chains and financial channels. The conflict demonstrates how quickly geopolitical shocks can affect energy markets, supply chains and financial conditions. As the EBRD Chief Economist Beata Javorcik notes, “The rise in energy prices comes at an already challenging time for the European manufacturing sector, while the broader consequences of the conflict are likely to put pressure on public budgets, which are already burdened by high defence spending in Central Europe and elevated debt servicing costs in the southern and eastern Mediterranean” (Javorcik B. 2026). Nevertheless, the economies of several countries in this group continue to demonstrate quite strong growth performance. The GDP of Turkey is expected to grow by 3.4% in 2026 (an important role in this growth is also played by its position as an intermediary in foreign economic relations between the West and the East). The economy of Poland is projected to expand by 3.3% in 2026, Albania by 3.4% and Kosovo by 3.3%. Even countries directly involved in the geopolitical conflict, such as Russia and Ukraine, are expected to record economic growth (1.1% and 2% respectively), which indicates a certain degree of adaptation of these economies to the active phase of the geopolitical conflict surrounding Ukraine.
A significant slowdown in economic growth is expected in the countries of the Middle East and Central Asia, which is directly linked to the negative impact of the geopolitical conflict in the Middle East. Thus, for this group of countries as a whole, the IMF projects GDP growth in 2026 at 1.9%, markedly lower than in 2025 (3.6%). In a number of countries, a substantial contraction in output is expected: in Iran, a decline of 6.1% (following a 1.5% decline in 2025), in Iraq 6.8%, in Qatar 8.6%, in Kuwait 0.6% and in Bahrain 0.5%. At the same time, despite the negative impact of the geopolitical conflict surrounding Iran, several Middle Eastern countries are expected to maintain relatively solid economic growth. In particular, Saudi Arabia’s GDP is projected to grow by 3.1% in 2026, Oman’s by 3.5% and Egypt’s by 4.2%.
However, economic growth in these countries is threatened by a decline in oil and gas production. Oil output by OPEC countries fell in April 2026 to a new 36-year low, as the war with Iran continued to disrupt exports from the Gulf states and suspend oil production, according to a study by Bloomberg based on vessel-tracking data, information from regional officials and estimates from Rapidan Energy Group, FGE NexantECA, Kpler and Rystad Energy. According to the survey, OPEC’s production in April 2026 decreased by 420 000 barrels per day, to 20.55 million barrels per day—the lowest level since 1990. In March, when Tehran first blocked the Strait of Hormuz, OPEC output had already fallen by 8.6 million barrels per day, marking the largest decline in decades. The survey showed that Kuwait experienced the greatest losses in April: its production fell to 800 000 barrels per day, three times lower than pre-conflict levels. The country’s exports also declined to 22 000 barrels per day.
Next in terms of production losses is Iran. At the initial stage of the war, the country managed to maintain exports while simultaneously preventing others from using the Strait of Hormuz; however, Tehran is now under pressure due to the American blockade of Iranian supplies. Iran’s oil production fell by 180 000 barrels per day to 3.05 million barrels per day. As Bloomberg (www.bloomberg.com) reports, the pace of Iran’s production decline has doubled since the beginning of the war.
The IMF projects strong economic growth for Georgia in 2026 at 6.5%, although this will be lower than in previous years (with economic growth reaching 9.7% in 2024 and 7.5% in 2025).
Georgia’s financial sector also demonstrates resilience. According to Lesley Bearman Lahm, Director of the Asian Development Bank Resident Mission in Georgia, “the accumulation of foreign currency reserves has strengthened the economy’s buffers against external shocks. As of February 2026, total international reserves reached a record level of around 6.65 billion dollars, exceeding the widely used adequacy benchmark. This is particularly important given the high level of dollarization in the economy and its sensitivity to external shocks,” Lahm stated in an interview with Business Insider Georgia. According to her, “downside risks remain elevated, especially due to Georgia’s vulnerability to global and regional shocks, persistent external price pressures, and a high degree of dollarization.”
In response to increased inflation risks, including pressure from rising global oil prices, the monetary policy rate remained relatively low at 8%. Lahm noted that the National Bank of Georgia has clearly stated its readiness to further tighten monetary policy in the event of stronger inflationary pressures or weakening inflation expectations (in May of this year, the policy rate was raised to 8.25%). Regarding the financial sector, according to the ADB representative, Georgia’s banking system remains resilient. Effective de-dollarization and macro-prudential measures implemented by the National Bank of Georgia have helped reduce foreign currency credit risks and excessive indebtedness. At the same time, the system has been strengthened through the introduction of a deposit insurance mechanism and the creation of a crisis resolution fund, enhancing financial stability and the banking sector’s capacity to manage crises. “High capital adequacy, strong profitability and a low level of non-performing loans reflect the solid fundamentals of the financial sector,” stated the ADB Resident Mission Director in Georgia. She also noted that “Georgia’s continued access to international capital markets, including the successful refinancing of Eurobonds amid strong investor interest and favorable pricing, further confirms confidence in the country’s macroeconomic management and financial stability.”
Georgia’s rapid economic development is accompanied by the stable performance of the country’s banking sector.
According to the international rating agency S&P Global, “economic risks for Georgian banks are balanced due to favorable macroeconomic growth prospects. Credit growth is expected to average around 15% per year through the end of 2026. Despite a gradual decline, Georgia still exhibits a higher-than-peer level of loan dollarization (43% in mid-2025) and deposit dollarization (51%), which continues to pose a potential risk of volatility for the Georgian national currency (the GEL). The share of non-performing loans has remained stable over the past 30 months at 2.6% of total loans. The banking sector remains stable: the market share of the two largest banks - Bank of Georgia and TBC Bank (both listed on the London Stock Exchange), exceeds 75% in key market segments. Georgian banks have stronger capitalization indicators than peers and adequate liquidity ratios” ( www.spglobal.com).
Thus, despite the significant adverse impact of external economic and geopolitical risks, Georgia’s economy and banking sector continue to develop successfully. However, this does not eliminate the need to implement a set of preventive and corrective measures aimed at maintaining financial stability and ensuring the resilience of the banking sector (Kovzanadze, 2011).
Economic growth in Latin American countries in 2026 is projected at 2.3%, broadly in line with the 2025 figure of 2.4%. The region’s leading economies are expected to show relatively solid performance: in 2026, Brazil’s economy is forecast to grow by 1.9%, Argentina by 3.5% and Mexico by 1.6%.
The economies of African countries are also expected to grow at a solid pace overall: in 2026, GDP growth is projected at 4.3%.
In 2026, a noticeable slowdown in global trade growth is also expected as a result of the above-mentioned combination of negative factors. After an increase in the volume of world trade of 5.1% in 2025, this indicator is projected to rise by 2.8% in 2026. At the same time, despite the negative impact of global economic fragmentation, sanctions, trade wars and geopolitical conflicts, a process of adaptation is underway as companies and countries seek new suppliers and establish new logistics routes. As a result, global trade continues to grow, although its growth rate in 2026 will be broadly in line with the long-term average of the past decade (2.9%). Exports from advanced economies are expected to increase by 2.6% in 2026 (compared to 3.7% in 2025), while exports from emerging and developing economies are projected to grow by 3.5% (compared to 7.4% in 2025). Imports into advanced economies are expected to rise by 2.6% this year (compared to 4.7% in 2025), while imports into developing economies will increase by 2.7% (compared to 5.7% in 2025).
Almost all experts are unanimous: in 2026, a significant acceleration of inflation is expected in many countries as a result of worsening global trade conditions due to escalating geopolitical risks, primarily driven by disruptions in oil and gas supplies from the Middle East. In 2026, the IMF forecasts a substantial increase in global prices, including fuel prices by 21.4%, other commodities by 21.7%, metals by 18.9% and food prices by 6%.
Inflation in advanced economies in 2026 is projected at 2.8%, significantly above the 2008–2017 average of 1.5%. In the United States, inflation is expected to reach 3.2% according to IMF forecasts (compared to an average of 1.7% in 2008–2017). Such an inflation level reduces the likelihood of a reduction in the Federal Reserve’s key interest rate. Not surprisingly, following its two-day meeting on April 28–29, 2026, the Federal Reserve kept its policy rate unchanged at 3.5–3.75% per annum, as stated in the regulator’s press release. The Fed left the rate unchanged for the third consecutive time. The Federal Reserve warned that developments in the Middle East are increasing uncertainty in economic forecasts. However, it reaffirmed its commitment to returning inflation to its 2% target level.
In 2026, inflation is expected to accelerate in many advanced economies, reaching 2.2% in Japan, 3.2% in the United Kingdom, 2.7% in Germany, 1.8% in France and 2.6% in Italy. In the euro area as a whole, the figure is projected at 2.6%. Overall, however, advanced economies are still managing to keep inflation within reasonable bounds. Nevertheless, historical experience clearly shows that during periods of escalating geopolitical conflicts—especially in the Middle East—energy prices tend to rise sharply in ways that are difficult to contain through monetary policy alone. This can even create risks of stagflation, as was observed in the 1970s in developed economies. Therefore, despite relatively optimistic official forecasts, the actual economic outlook will largely depend on the evolution of the conflict surrounding Iran. In the event of a significant and prolonged escalation, the negative impact on both advanced and developing economies could be substantial.
In emerging market and developing economies, inflation in 2026 is expected to reach 5.5%. Although this represents a slight acceleration compared to 2025, it is still projected to remain below the average level recorded in 2008–2017 (5.7%).
In developing Asian countries, inflation is expected to accelerate from 1.1% in 2025 to 2.6% in 2026, although it will still remain within reasonable and manageable limits. In China, inflation is projected at 1.2% in the current year, following zero growth in 2025. In India, price growth is expected to accelerate from 2.1% in 2025 to 4.7% in 2026.
Inflation in Eastern European emerging market economies is expected to be very high in 2026. At the same time, it has remained elevated since 2022. The highest levels of inflation in this group are projected for Turkey, at 28.6%. In Russia and Ukraine, despite the acute phase of the geopolitical conflict, inflation is expected to remain under control, with the IMF forecasting rates of 5.6% and 6.1% respectively in 2026.
In the countries of the Middle East and Central Asia, inflation in 2026 is expected to reach 11.9%, including 75.1% in Sudan, 68.9% in Iran, 26.5% in Yemen, 13.2% in Egypt, 10.7% in Kazakhstan, 10.6% in the Kyrgyz Republic and 10.5% in Libya.
In Georgia, according to IMF estimates, prices are expected to increase by 4.4% in 2026. This is higher than in 2024 (1.1%) and 2025 (3.9%). Undoubtedly, a significant increase in energy prices—especially if it proves prolonged due to the geopolitical conflict surrounding Iran—poses substantial risks to price stability in all countries, including Georgia.
Despite numerous negative macroeconomic and geopolitical factors, the situation with public finances in most countries remains broadly stable and no significant deterioration in fiscal balances or public debt levels is expected. In 2026, the IMF forecasts an increase in the budget deficit to 7.5% in the United States and to 3.3% in the euro area. However, despite some deterioration, these figures still broadly correspond to the 2008–2017 average.
No significant increase in the level of public debt is also expected in 2026. Thus, the public debt of the United States is projected to rise from 123.9% of GDP in 2025 to 125.8% of GDP in 2026. The public debt of euro area countries is also expected to increase only marginally, from 87.1% of GDP in 2025 to 87.8% of GDP in 2026.
Trade and sanctions wars, as well as the escalation of geopolitical conflicts, have negatively affected the state of global trade and the balance of payments of many countries. In 2026, advanced economies as a group are expected to return to a current account deficit after several years of surplus. In the United States, the deficit is projected to reach 3.7% of GDP (compared with 4% in 2024 and 3.6% in 2025). Thus, despite large-scale protectionist measures in the United States, no fundamental improvement in the country’s balance of payments has yet been achieved. In the euro area, a current account surplus has been maintained for several years; however, in 2026 this indicator (1.3% of GDP) will be lower than in 2024 (2.7% of GDP) and 2025 (1.6% of GDP). Among advanced economies, in addition to the United States, current account deficits are also projected in 2026 in France (0.3% of GDP), the United Kingdom (3.4% of GDP), Canada (0.2% of GDP), Australia (2.3% of GDP), Belgium (2% of GDP), Greece (6.4% of GDP), Bulgaria (4% of GDP), Slovakia (3% of GDP), Croatia (3.8% of GDP), Latvia (3.6% of GDP), Estonia (1.1% of GDP) and Cyprus (9.3% of GDP).
The current account surplus is projected for China at 3.5% of GDP. India, however, is expected to record a current account deficit of 2% of GDP.
For Eastern European emerging market economies, the current account balance is expected to turn negative again in 2026. In particular, several countries (including Kosovo, Moldova, Montenegro and Ukraine) are projected to record deficits exceeding 10% of GDP.

Conclusion

Uncertainty surrounding the evolution of geopolitical conflicts makes it difficult to produce precise forecasts for the global economy in 2026. However, it can be stated with certainty that the negative impact of, for example, the conflict in the Middle East is already very significant. The sharp increase in global prices for fuel and other commodities, disruptions in the supply of goods from Middle Eastern countries, a substantial rise in military spending in many countries, the destruction of industrial and civilian infrastructure in some states, growing fragmentation and politicization of international economic relations, and the continued increase in public and corporate debt—reaching very high levels in some major economies—all of these factors threaten the sustainable development of the global economy as a whole, as well as the development of individual countries and regions.
In these circumstances, the efforts of all countries should be directed toward de-escalating conflicts and seeking mutually acceptable solutions for all parties involved. At the same time, for sustainable development under conditions of ongoing and even intensifying geopolitical conflicts, many countries need a pragmatic policy focused on diversifying supply sources, building reserves and strengthening regional and international cooperation. It is also important to maintain effective regulation and supervision, state support for social and economic infrastructure, and the stability of public finances and monetary systems. Sound risk management at the level of enterprises, industries and the economy as a whole can, to a certain extent, mitigate the negative impact of geopolitical risks. Particular attention should be paid to the financial sector, as well as to preventive and corrective measures (Kovzanadze,2011). aimed at avoiding systemic banking crises, which can cause severe harm to a country’s socio-economic development.
Overall, the challenges of recent years strongly call upon both advanced economies and emerging and developing countries to build a new, more effective model of socio-economic development (Kovzanadze, 2018), strengthen regional and international integration, and overcome fragmentation in the global economy.

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• Current Condition of Commercial banks Loan Portfolio (2026). National Bank of Georgia, February
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