Middle East Outlook for 2025: Navigating risks and opportunities amid regional turmoil

As 2024 comes to a close, the Middle East finds itself at the end of an extremely turbulent and eventful year, according to the latest Middle East Outlook 2025 report published by the Economist Intelligence Unit. 

A year marked by intensifying conflicts, disrupted trade, and shifting geopolitical alliances has set the stage for a precarious yet potentially transformative 2025.

Conflict and Instability: Israel and Iran on the Brink

The ongoing conflict between Israel and Iran, including its regional proxies, has escalated dramatically, defying expectations. The violence has wreaked devastation in Gaza and destruction in Lebanon, while direct missile exchanges between Israel and Iran have brought both nations to the brink of all-out war. 

These hostilities have severely disrupted global trade, particularly through the Red Sea, as Iran-backed Houthis in Yemen have targeted shipping routes, causing elevated operating costs and heightened risks for global commerce.

Efforts at Arab-Israeli normalization, once seen as a pathway to regional stability, have stalled amid heightened tensions over the plight of Palestinian and Lebanese civilians. 

Meanwhile, Iran, under the strain of international sanctions and domestic unrest, has tightened its authoritarian grip to maintain control.

2025: Questions Surrounding the Conflict

Looking ahead, several key questions will shape the trajectory of the region in 2025:

1. Israel’s Strategy:
   How far will Israeli Prime Minister Benjamin Netanyahu and his extreme-right coalition government go in pursuing their national security, domestic political, and geopolitical objectives?
2. Iran’s Response:
   How willing and capable is Iran (and its proxies) of mounting a direct confrontation with Israel?
3. US Involvement:
   What role will the new US president play in resolving regional tensions or mediating peace efforts?

While the outlook anticipates a partial de-escalation in 2025, with both Israel and Iran refraining from direct warfare, the risk of rapid escalation remains high, posing a threat to global energy supplies and international trade.

Economic Growth Amid Geopolitical Risks

Despite the political and security challenges, economic growth is expected to accelerate across most Middle Eastern countries in 2025, contingent on the conflict remaining contained. Key highlights include:

• Energy and Trade Resilience:
  Assuming the conflict does not expand beyond its current spheres, the impact on energy and goods trade flowing through the region will likely be minimal. This stability is essential for maintaining the region's global economic role.
• GCC Investment Growth:
  The Gulf Cooperation Council (GCC) states, insulated from much of the geopolitical turmoil, are expected to continue attracting elevated levels of diversified foreign investment. While some projects may face slight adjustments, the overall trajectory of foreign direct investment (FDI) into Gulf infrastructure and energy initiatives remains strong.
• China’s Influence:
  China’s initiatives to enhance its commercial and geopolitical footprint in the Middle East are expected to progress, further integrating the region into its global strategy.

The region’s macroeconomic landscape presents a mix of risks and opportunities. Political instability and conflict continue to pose threats to trade and investment flows, yet economic diversification efforts, particularly in the Gulf states, provide a foundation for growth.

The Middle East remains a critical focal point for global stakeholders navigating today’s unpredictable geopolitical landscape. A clear understanding of regional risks and macroeconomic trends will be essential for governments, businesses, and investors looking to stay ahead in 2025.

As the region balances on the knife-edge of conflict and economic promise, its ability to maintain stability and pursue growth will shape not only its future but also its influence on global markets and international diplomacy.