Growth in the Middle East and North Africa (Mena) will slow by nearly half this year, the World Bank said yesterday.
The warning came as it pointed to fresh risks across the region and a deteriorating outlook in the euro zone.
The institution forecast economic expansion in the Mena region of 0.6 per cent, down from 1 per cent last year. The impact of sanctions on growth in Iran and continued GDP declines in Syria and Yemen were among the main reasons for the lower forecast it said. But it warned that threats to the region from the euro zone loomed large.
"Globally, the main risk is the financial turmoil in Europe and that will affect the Middle East," said Hans Timmer, the director of development prospects at the World Bank. "Capital flows came down sharply in May and that is true for countries in the Mena region, which already suffered a sharp fall in capital flows last year."
Oil prices were a further uncertainty for the region, with crude prices sliding by about 19 per cent since the start of the year, it said.
The report was published ahead of another day of doom and gloom in the euro zone as the latest data showed industrial production in the single-currency bloc dipped for a second month in April, led by a drop in Germany.
A €100 billion (Dh460.49bn) bailout for Spain's banking system, announced on Saturday, failed to ease concern about the future of the bloc as borrowing costs for Spain and Italy have continued to edge higher.
Developing countries should prepare for a long period of volatility in the global economy, the World Bank said in the report.
A resurgence of tensions in Europe had eroded gains in stocks and economic activity made during the first four months of the year, it said. Developing and advanced-country stock markets had lost about 7 per cent since May 1, it said.
The World Bank believes the most likely scenario for the euro zone is that policymakers will "muddle through" their problems. A break-up of the single currency was less likely, said Mr Timmer.
Under the worst-case scenario, remittances from the euro zone to developing countries including those in the Mena region could drop 5 per cent, he said.
"It used to be just [the impact on] trade flows and tourism but the transmission mechanisms are now much broader and also include the impact on remittances and the reversal of capital flows," he said.
"But the most important factor is the confidence factor, which means people stop buying and investing." Signs of a slowdown in China and India should be less of a worry for the Mena region as expansion would still be strong, he said.
But the deteriorating global outlook is still a fresh blow to regional economies striving to recover from civil unrest since last year.
Foreign direct investment inflows to the region more than halved last year, dropping to an estimated US$9.5bn (Dh34.89bn), with the Maghreb, Syria, Jordan and Egypt the hardest hit, the World Bank said. Capital inflows fell by almost 90 per cent in the year, it said.
"Assuming a degree of stabilisation in the political situation in the Middle East and North Africa during 2012 … regional growth is projected at 0.6 per cent for the year, largely as sanctions take hold on growth in Iran and GDP continues to decline in Syria and Yemen," the World Bank said in the report.
As these factors fade in importance, growth was expected to pick up to 2.2 per cent next year, accelerating to 3.4 per cent in 2014, it said.
That is still lower than the 3.8 per cent growth the region posted in 2010, the World Bank said.