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The psychological trauma of war will have a major impact on the long-term economic outlook for Gaza, where economic activity is already at a near standstill, the World Bank once again warned in its latest outlook for the Middle East and North Africa.

The report, published on Monday, offered a grim outlook for Gaza's economy – and the Palestinian economy as a whole – as recent drone and missile strikes by Iran against Israel threaten to escalate a conflict that Arab states and the US have been trying to avoid.

Previous reports showed Gaza's economy contracted by 86 per cent in the fourth quarter last year and its long-term outlook remains just as bleak: World Bank economists said economic activity in the densely populated strip has ground to a virtual halt, “with little promise of improvement”.

The long-term challenges for Gaza include the destruction of its fixed assets and the famine and displacement faced by civilians.

To date, the war has caused the displacement of about 1.7 million people, and a recent UN report said more than a million civilians will experience famine unless more humanitarian assistance is delivered.

Previous reports have examined the negative impact deteriorating mental health has had on Gaza's long-term economic future.

A June 2023 study found that 58 per cent of adult Palestinians showed symptoms consistent with depression – that includes about half of adults in the West Bank and 71 per cent in Gaza.

“That trauma is reinforced by the economic disempowerment and the loss of sense of agency caused by high unemployment and a lack of economic prospects,” the World Bank said.

Economists also said extreme stress from displacement and destruction will further hinder Palestinians' mental health, worsening their long-term productivity by blocking them from fully developing their education and skills.

Economic losses due to mental trauma in 2022 equated to about 8.9 per cent of Palestine's gross domestic product, the World Bank reported. And nearly all Gazans are presumed to have been exposed to a traumatic event.

“The psychological burden of the current conflict is expected to exacerbate the negative effect of conflict on the economy, contributing to a vicious spiral of poor mental health, lower economic activity and productivity, sustained high unemployment and poverty,” the World Bank said.

Escalating tension adds to Mena's uncertain outlook

Overall, Mena economies are expected to return to low growth similar to the decade before the pandemic. The region's GDP is projected to rise 2.7 per cent this year after a 1.9 per cent gain in 2023, the World Bank reported.

Gulf Co-operation Council country economies are expected to grow 2.8 per cent this year and 4.7 per cent in 2025, largely driven by higher oil output due to phasing out production cuts as well as growth in the non-oil sector, the body said.

“The region continues to grapple with high uncertainty, which may worsen existing fragilities in several Mena economies,” the report said.

The Israel-Gaza war, tepid growth and rising debt levels are all affecting the region.

The report, which was written before Iran's retaliatory attack on Israel, said the economic impact of the war on Mena economies will depend on its duration and whether it spills into the region.

The attack prompted world leaders to call for de-escalation efforts, with the UAE urging “the utmost restraint”. G7 countries issued a joint statement saying they are working to “stabilise the situation and avoid further conflict”.

Egypt, whose economy has been affected by trade disruption in the Red Sea, called for maximum restraint. Egypt and Jordan are more likely to be affected by hits to tourism, fiscal pressures and foreign exchange receipts than GCC nations or Morocco.

The World Bank has previously said Lebanon's financial crisis is one of the worst since 1850. Monday's report said the infrastructural damage caused by fighting in southern Lebanon has further weighed down its economic prospects.

“Even under a 'confined conflict' scenario, the spillover effects of the hostilities constitute another large shock to a country already in a political and institutional vacuum and mired in a years-old socioeconomic crisis,” the report said.

The tourism shock that Lebanon has faced since the fourth quarter of last year has affected its overall economy.

Before the conflict, Lebanon's economic growth was projected to slightly expand for the first time in years. Instead, it contracted 0.2 per cent, the World Bank said.