The most recent Economic Insight report for the Middle East, conducted by ICAEW and compiled by Oxford Economics, anticipates a deceleration in 2024 due to ongoing oil production reductions.
The growth forecast for the GCC has been adjusted downward to 2.7% from 3.9% three months earlier. However, growth in non-energy sectors is projected to propel economic expansion in Saudi Arabia and the UAE.
Although the energy sector is dampening GCC economic growth, strong performance in non-energy sectors is anticipated to partially counterbalance the impact. However, disruptions in shipping routes via the Red Sea and Suez Canal have led to increased freight and raw material expenses, indicating a potential slowdown in momentum in the upcoming months.
The latest GDP growth projections for Saudi Arabia and the UAE have been revised downward to 2.1% and 4.4%, respectively, compared to 4.4% and 4.8% three months earlier. These adjustments reflect the resilience of their non-oil economies and the gradual relaxation of oil production cuts starting from the third quarter.
Recent data for the fourth quarter of 2023 reveals a year-on-year decline of 3.7% in Saudi Arabia’s GDP, following a contraction of 4.4% in the third quarter. On the other hand, the UAE’s non-oil GDP is estimated to have expanded by 5.6% in 2023, contributing to an overall GDP growth rate of 3%.
These figures underscore the ongoing transition of both economies away from reliance on oil, with non-oil sectors playing a pivotal role in driving growth. Despite challenges such as disruptions in shipping routes and the persistence of oil production cuts, the outlook remains positive as both Saudi Arabia and the UAE continue to diversify their economies and stimulate growth in non-oil sectors.
The significant decrease in GCC oil production last year, triggered by the implementation of oil cuts, established a remarkably low starting point. Despite the OPEC+ group’s decision to prolong output cuts into the second quarter, the regional energy sector is poised for growth in the current year. The report anticipates a collective expansion of the energy sectors by 1.3%, marking a substantial improvement from the 5.7% decline observed last year. Specifically in Saudi Arabia, oil activities are projected to increase by 0.7% this year following a steep 9.5% year-on-year drop in 2023.
The non-energy sectors in the GCC region are poised to sustain their growth momentum, driven by both government and private sector investments. Saudi Arabia remains committed to advancing its Vision 2030 agenda by allocating funds towards ambitious giga and mega projects. Additionally, the country is gearing up for major events such as Expo 2030 and the FIFA World Cup 2034, further stimulating investment across various sectors.
Similarly, the UAE is expected to see robust investment activity as it progresses with initiatives like ‘We the UAE 2031’ and the Dubai Economic Agenda D33. These strategic plans aim to enhance economic diversification and drive sustainable growth across different industries.
Meanwhile, Qatar’s plans for expanding LNG capacity in the latter part of the decade are anticipated to yield positive medium-term outcomes. The investment in LNG infrastructure is expected to bolster economic activity and contribute to the country’s long-term growth trajectory.
Overall, government-led initiatives and private sector investments are set to play a pivotal role in driving growth and diversification in the non-energy sectors of the GCC economies, paving the way for sustained development and prosperity in the region.
Hanadi Khalife, Head of Middle East at ICAEW, expressed optimism despite the challenges facing the GCC economic outlook due to the conflict in Gaza and disruptions in Red Sea trade. Khalife highlighted the resilience of non-energy sectors in driving recovery. The steadfast commitment of the UAE and Saudi Arabia to diversify their economies away from oil and meet ambitious vision deadlines underscores their pragmatic and fiscally responsible approach.
Khalife noted initiatives such as the Kingdom’s bond sales abroad to address fiscal deficits and the UAE’s removal from the Financial Action Task Force (FATF) grey list as significant developments. These actions are expected to bolster the reputations of both countries and attract more foreign direct investment.
According to Scott Livermore, Economic Advisor at ICAEW and Chief Economist and Managing Director at Oxford Economics Middle East, the Middle East is encountering mounting challenges, with many economies anticipated to experience a slowdown this year. Additionally, regional fiscal policies are expected to remain relatively unsupportive.
Livermore highlighted Saudi Arabia’s recent achievement in raising $12 billion through its largest bond sale since 2017. This successful issuance demonstrates market confidence in the Kingdom’s creditworthiness. The funds raised from this bond sale are expected to cover approximately half of the government’s projected borrowing needs for the year, as it continues to invest in diversification projects.
The tourism sector will continue to play a pivotal role in the growth agendas of both Saudi Arabia and the UAE. Dubai International Airport saw a remarkable influx of 86.9 million passengers last year, surpassing pre-pandemic levels. Similarly, the Kingdom’s airports welcomed 106.2 million visitors last year, marking a significant 12% increase compared to 2022. These statistics underscore the resilience and recovery of the tourism industry in both countries, highlighting its importance as a key driver of economic growth and development.
The report also forecasts that inflation in the GCC region will remain at approximately 2.5%, largely influenced by housing expenses. Favorable trends in inflation have alleviated worries about potential interest rate increases by the Federal Reserve and central banks across the GCC countries. It is anticipated that the first-rate reduction will occur in the second quarter, followed by a gradual decline in interest rates thereafter. This loosening of monetary policy is expected to stimulate credit growth within the region and bolster momentum in the real estate sector, thereby supporting domestic investment initiatives.
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