GDP growth in the Gulf Cooperation Council is expected to more than halve to 2.8% this year from 7.5% last year, a report said, as slower growth in energy output, high inflation and higher borrowing costs weigh on demand and economic activity .
The latest Gulf Cooperation Council (GCC) Economic Insights report, commissioned by ICAEW and compiled by Oxford Economics, shows the region will expand modestly in 2023 amid global challenges.
Despite the economic slowdown, ICAEW’s estimates for the GCC were slightly higher than the 7.1% expansion in 2022 and 2.5% expansion in 2023 reported three months ago. This was due to a strong growth performance at the end of last year, especially in Saudi Arabia and the UAE. New data recently released showed that the Saudi economy grew by 8.7% last year, making it one of the fastest growing economies in the world.
According to the first-quarter report, the slowdown in the GCC will become more pronounced as oil production cuts and policy tightening take hold. Supported by healthy demand and sentiment, the GCC entered 2023 with strong momentum, the latest purchasing managers’ index showed, even as slowing global growth weighed on export orders.
ICAEW’s price forecasts have also been lowered, now predicting Brent crude will average $85 a barrel this year, compared with $92.1 a barrel three months ago. Continued strength in the U.S. dollar and concerns over global demand forecasts weighed on crude prices, although China’s surprise reopening after a pandemic lockdown offset some of the downward pressure.
OPEC countries have been sticking to production targets agreed in November, and unless the oil market tightens sharply, ICAEW expects the group’s next meeting in April and beyond to maintain quotas.
OPEC policy is again a drag on GCC energy output growth, which is expected to slow to just 0.5% in 2023. The oil sector was the main driver behind last year’s outperformance in GDP, rising 11 percent, largely driven by higher output from the larger Gulf Cooperation Council producers.
Travel and tourism will continue to support non-oil activities. Inbound tourism is expected to continue to recover this year as countries invest in tourism development opportunities. That said, a full recovery to 2019 levels won’t take until 2024, especially since a stronger dollar makes the region more expensive for tourists.
The ICAEW found that this year’s budget spending is expected to provide significant support to the non-oil sector. Given the reliance of regional budgets on oil and gas revenues, their financial position improves significantly in 2022. Governments are wary of energy windfalls, using them to replenish reserves and pay down debt, with spending growth limited.
While commodity prices have softened in recent months, they remain above most countries’ fiscal balance levels, enabling most governments to generate enough revenue to maintain budget surpluses. Similar to 2022, the GCC region as a whole is expected to have a GDP surplus of around 5%.
The transition to net zero will remain a key diversity theme in 2023 as the UAE prepares to host COP28. The UAE is the first country in the region to develop a green plan, committing to invest $163 billion to achieve net-zero emissions by 2050. Saudi Arabia followed suit with a $190 billion green initiative, with 10 clean energy projects highlighted in its 2023 budget.
Hanadi Khalife, Head of Middle East at ICAEW, said: “Continuing to increase investment in the non-oil sector will not only help the GCC countries to remain resilient this year, but will also be critical to achieving net zero commitments, which for many are at the heart of their economic visions. “
Scott Livermore, ICAEW economic adviser and chief economist and managing director for the Middle East at Oxford Economics, said: “As gains in the oil sector dry up, non-oil activity is again leading the recovery in the GCC. The latest purchases The overall picture painted by the MMIs is positive, supported by strong market sentiment and contained price pressures.
“We are particularly bullish on Saudi Arabia, with a national investment strategy underpinning the growth and investment outlook and consumer spending indicators pointing to a continued strong recovery.
“At the same time, the UAE’s policies to support the expansion of key sectors, embedded in the ‘We UAE 2031’ vision, will drive growth.”
Higher-than-expected inflation remains the main risk to non-oil activity. Average inflation has generally fallen amid lower global commodity prices, but there are several country-specific factors at play, including a reversal in inflation trends after the World Cup in Qatar and a high starting base for doubling VAT rates in Bahrain.
In contrast, inflation in Saudi Arabia edged higher, driven by rising rents. Inflation in the GCC is expected to ease back to 2.4% this year from 3.4% in 2022, but domestic price pressures, particularly sticky price pressures from housing, will limit the rate of decline.
Meanwhile, economic resilience in the U.S. will require further rate hikes from the Federal Reserve, and most central banks in the GCC are expected to follow suit, even as inflationary pressures in the region ease. The impact of aggressive policy tightening over the past 12 months will continue to filter through to economic activity, supporting the view that GCC non-oil GDP growth will slow to 4% this year from 5.7% in 2022. trade arab news agency