WASHINGTON, D.C. — Gulf states that have spent the past decade diversifying away from oil are confronting a sharp contraction in growth as the war in Iran destabilises regional trade, forces a surge in defence budgets and strains supply‑chain resilience, analysts say.

Since the conflict erupted in early 2024, Saudi Arabia’s imports of Iranian petrochemicals have fallen by roughly 15 %, while the United Arab Emirates has reported a 12 % drop in non‑energy exports, according to data from the Gulf Cooperation Council. The slowdown has pushed the region’s combined GDP growth to a negative 3.2 % for the year, a stark reversal from the 2.5 % expansion recorded in 2023.

In response, Riyadh has lifted its defence spending by 12 % to an estimated $78 billion, earmarking funds for missile‑defence systems and naval patrols. “We cannot afford to let the conflict in Iran destabilise our supply chains or threaten our citizens,” said Saudi Defence Minister Prince Khalid bin Salman. The budget increase reflects a broader shift toward security‑driven investment, diverting resources from infrastructure projects that were slated for completion before the war.

Abu Dhabi, meanwhile, is scrambling to protect its ambitious diversification agenda. The UAE’s non‑oil sector, which contributed 45 % of GDP in 2023, now faces a 10 % contraction in manufacturing output. “The slowdown has forced us to reconsider our diversification plans and accelerate energy‑security measures,” noted Dr. Leila Al Mansoori, an economist at the Emirates Institute for Strategic Studies. The government is boosting strategic petroleum reserves and exploring joint ventures to secure alternative feedstock for its petrochemical complex in Ruwais.

Regional logistics hubs such as Dubai’s Jebel Ali port have reported container throughput declines of 18 % over the past six months, prompting operators to reroute cargo through Oman and Qatar. Supply‑chain analysts warn that prolonged disruptions could erode the Gulf’s reputation as a reliable trans‑shipment gateway, potentially shifting trade flows toward Mediterranean and South‑Asian corridors.

Key Takeaways

• Defense budgets in Saudi Arabia and the UAE have risen by double digits, diverting funds from civilian projects.
• Non‑energy exports across the Gulf have fallen between 10 % and 15 % since the war began, driving a negative 3.2 % regional GDP growth.
• Supply‑chain bottlenecks threaten the Gulf’s logistics hub status, with container throughput down 18 % at major ports.

Unless diplomatic channels can de‑escalate the Iran conflict and restore stable trade routes, Gulf economies risk a prolonged recession that could undermine years of diversification and leave the region more reliant on volatile energy markets.