Growth for the Barbados economy in 2026 has been revised down to 1.7% from 1.9%, which was projected at the start of the year, coming from a growth of 2.7% in 2025.

This latest forecast reflects subdued economic activity in the first half of 2026 and more prolonged spillover effects from the US-Iran conflict. Meanwhile, average inflation is forecast to rise to 2.1% in 2026 from 0.9% in 2025, as continued instability in the Middle East prolongs disruptions to global shipping and sustains pressure on international oil prices, driving up imported inflation.

However, government measures to cushion the impact on households are expected to prevent a sharper rise in inflation in the near term. On the fiscal front, the budget deficit is expected to widen from an estimated 0.2% of GDP in FY2025/26 to 1.2% in FY2026/27, as the government increases spending to support growth, upgrade infrastructure and provide targeted assistance to households and businesses.

Wider deficit expected

Despite the wider deficit, fiscal policy is expected to remain prudent and anchored by a healthy primary surplus, supporting a gradual decline in gross public debt from around 95.5% of GDP at end-FY2025/26 towards the government’s long-term target of 60%. As a result, the Central Bank is expected to maintain the exchange rate peg at BBD2.00/USD, which remains well supported by international reserves despite a widening external deficit stemming from the oil price shock.

Risks to the outlook remain tilted to the downside, particularly if a new US/Iran agreement to reopen the Strait of Hormuz is not reached before Q4 or the conflict escalates further. A more severe and prolonged oil price shock could push inflation higher and weaken growth beyond current forecasts. 

A potentially severe El Niño event could also strain water supplies, weigh on agriculture and add to local food-price pressures, while broader climate risks remain a concern for the tourism sector. Conversely, faster implementation of economic reforms could accelerate inward investment and provide upside to growth.