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Middle East outlook ‘positive’ as largest economy eyes $1 trillion milestone

GCC GDP growth Saudi Arabia Haidan, Unsplash
Saudi Arabia posted its highest growth in over a decade in Q2 at 12.2 percent, boosted by a 23.1 percent rise in oil activities
  • GCC region predicted a 9.7% GDP surplus
  • 7.6% rise in Saudi GDP expected to tip it over $1trn
  • Private sector also gains from high oil prices and production

The outlook for most Middle East economies remains positive despite a significant downgrade in global GDP growth, rising inflation and interest rates, according to new research.

Analysts at the Institute of Chartered Accountants in England and Wales (ICAEW) predict regional growth of 5.5 percent this year, up 0.3 percent on their forecast three months ago.

And they expect Saudi Arabia, the region’s largest economy, to surpass the $1 trillion GDP mark for the first time amid strong growth during 2022.

The Middle East growth is built on projections for activity in the GCC economies where GDP is seen growing by 6.7 percent, the fastest rate since 2011.

This growth was driven by higher oil production but also the recycling of government revenues into investment initiatives and, to a lesser extent, household and business spending. 

ICAEW said in its latest Economic Update: Middle East report that the outlook is much more challenging in the rest of the Middle East region.

It pointed especially to countries like Jordan and Lebanon, where domestic demand is under pressure from high inflation.

Scott Livermore, chief economist and managing director at Oxford Economics Middle East, said momentum in the regional economy has “remained robust when the rest of the world is battling recession worries”. 

He added that oil production increases and high oil prices have “created a positive dynamic that has also spilled over into the private sector”.

ICAEW also revised its 2022 oil price projection downwards to $103.8 per barrel compared to $112 three months ago. Oil prices have been trending down since the beginning of June and Brent crude prices now stand below $100.

Indicators measuring the region’s non-oil performance also point to ongoing strength, even as inflation remains high. ICAEW forecasts an expansion in GCC non-oil GDP of 4.4 percent in 2022, slightly up on its forecast three months ago.

Its report noted that travel and tourism activity has gathered momentum, with inbound travel to the region outpacing global trends, in part thanks to major international events, including the forthcoming FIFA World Cup in Qatar, which the authorities hope will attract 1.5 million visitors later this year. 

“Clearly Qatar will benefit the most but it’s set up to spill over into the other countries in the Gulf and I think the UAE and Dubai stand ready to capitalise to a significant degree,” Livermore said.

“You have to remember that for most fans Qatar is a long-haul trip so they want the broader tourism experience which Dubai and the UAE offer.” 

However, a recession elsewhere in the world “could really knock the wind out of the sails,” he cautioned, adding that a recession in the US and Europe could hit tourism numbers while economic woes in China could see a significant slowdown in the oil market.

Although oil prices have eased, they remain supportive of public finances and ICAEW said it continues to expect a surplus of 9.7 percent of GDP for the GCC region as a whole, the highest since 2012. 

This will drive a decline in the debt-to-GDP ratios. Much of the GCC retains plenty of fiscal headroom, with fiscal breakeven prices (as estimated by the International Monetary Fund) below $80 per barrel in all GCC countries except Bahrain. 

ICAEW also said latest inflation figures for several of GCC’s economies line up with its view of price pressures peaking in the region. It forecasts average GCC inflation at 3.1 percent this year, before it slows to 2.7 percent in 2023.

“As the US Federal Reserve continues its hiking cycle to tackle rising inflation, all central banks across the GCC region have tightened monetary policy. Given the currency pegs to the US dollar, regional policy rates don’t tend to fall too far out of step with the US, which we expect to continue hiking until early 2023,” said the ICAEW report.

It added that Kuwait will remain the least hawkish and while further increases from Kuwait’s central bank are expected, they are unlikely to keep pace with the Fed, as the Kuwaiti Dinar is pegged to a basket of currencies.

ICAEW expects Saudi Arabia’s GDP will rise by 7.6 percent this year, with oil production hovering close to all-time highs. 

“We expect the kingdom to surpass the $1 trillion GDP mark for the first time, showing progress against the Vision 2030 target of $1.7 trillion,” it said.

Following the expansion of 9.9 percent year-on-year in Q1, Saudi Arabia posted its highest growth in over a decade in Q2 at 12.2 percent, boosted by a 23.1 percent rise in oil activities. The non-oil economy is also benefitting from higher oil income, with activities growing 5.4 percent in Q2. 

“We see non-oil growth of 5.1 percent this year, helping propel the national employment rate further after it rose to a high of 89.9 percent in Q1,” ICAEW noted.

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