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The year ahead for the GCC economies

The better-than-expected news on inflation has taken the prospect of additional rate rises off the table

A hiker on Jebel Shams mountain in Ras Al Khaimah, the highest point in the UAE. Tourism and renewables will remain 'major diversification engines' in the GCC economies Shutterstock
A hiker on Jebel Shams mountain in Ras Al Khaimah, the highest point in the UAE. Tourism and renewables will remain 'major diversification engines' in the GCC economies

The Gulf region performed less well in 2023 than we initially thought. GDP growth across the GCC economies is expected to average just 0.7 percent for the year, because of the significant drag from Opec+ production quotas.

However, the situation will improve significantly in 2024 and defy the global economic slowdown.

Oxford Economics expects the GCC to achieve an above-consensus growth forecast of 3.9 percent, with the UAE and Saudi Arabia leading the way.

There are five themes we are looking at when assessing the outlook for 2024.

Oil sector turnaround

The extension of Saudi Arabia’s additional voluntary oil production cut of one million barrels per day to the end of the first quarter and further voluntary cuts by other Opec+ members have done little to bolster oil prices.

Additional production from the US and elsewhere, as well as the voluntary nature of the additional cuts, mean plans to limit supply lack a degree of credibility, and concerns over the demand outlook still dominate.

Therefore, we expect regional producers to have to stick to oil supply curbs in the near term, before unwinding them later in 2024. This will translate into a positive contribution from the energy sector after a retreat this year. 

Interest rates on hold

The better-than-expected news on inflation over recent months has taken the prospect of additional rate hikes off the table for the Federal Reserve and, hence, for GCC central banks.

We think the Fed is now on a prolonged hold. Officials’ hawkish rhetoric, the resilient US economy, and wage growth that is still too strong all argue in favour of a later pivot than the spring rate cut markets have priced in.

If anything, we expect policymakers to err on the side of leaving rates too high for too long. We expect the first cut to come in the summer and for rates to fall only slowly.

Non-oil economy expansion

Our main call for 2024 is that the non-oil economy will expand by 4 percent across the GCC, with Saudi Arabia seeing growth of 5.4 percent in the private non-oil economy and the the UAE’s non-oil sector expanding by more than 4 percent. 

Government policies will underpin this resilience: we see a broadly stable fiscal outlook, and growth in off-budget spending in Saudi Arabia and the UAE, helped by a pick-up in oil production through 2024 and a stable oil price outlook.

Non-energy sectors will benefit from investments into existing and emerging industries. Saudi Arabia will push forward with Vision 2030 by pumping funds into giga and mega projects, and start to turn its attention to Expo 2030 and the FIFA World Cup 2034.

Investment activity is expected to be strong in the UAE as plans around ‘We the UAE 2031’, Dubai Economic Agenda D33, and other strategies are implemented.

The investment drive will create jobs, supporting demand. The latest data points to double-digit employment growth across various sectors in Saudi Arabia, while the UAE jobs market remains strong.

Tourism and renewables will remain major diversification engines. We see steadfast investment in non-energy sectors, including tourism and renewables, as it is the essence of regional development visions.

Inflation troughs in some regions

Inflation has fallen across the GCC as it has done in other parts of the world after energy and food price drops, and the easing of supply chain disruption.

However, inflation has passed its low point already in Dubai. We see little scope for continued disinflation across the GCC in the near-term as base effects from energy and food prices fade. 

Moreover, real estate will remain a source of upward pressure in 2024 as the countries in the region enjoy strong economic and population growth. Nevertheless, GCC inflation will average a similar rate in 2024 to 2023, and hover at a comparatively low levels in a global context. 

Threats from the Israel-Hamas conflict

Overall, we consider the risks to the outlook in the GCC to be fairly balanced, with the likelihood of growth exceeding our forecast as high.

However, our optimistic view is vulnerable to a regional escalation in the Israel-Hamas conflict. A scenario that disrupts oil supply, has a negative impact on investment and travel demand, and leads to a deterioration in the global macro backdrop would dampen the growth outlook for the GCC. 

In such a scenario, our analysis suggests GCC growth would be 1.8 percent lower than we are currently forecasting.

Scott Livermore is chief economist at Oxford Economics

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