Oil cuts hit GCC growth; Saudi Arabia and the United Arab Emirates resist in non-energy sectors

The latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, projects a slowdown in 2024 as oil production cuts persist.

The GCC growth forecast has been revised down to 2.7% from 3.9% three months ago, while non-energy sectors are expected to drive growth in Saudi Arabia and the United Arab Emirates.

Although the energy sector puts downward pressure on the GCC’s economic growth, strong non-energy performance is expected to offset some of the impact. However, disruptions to shipping routes through the Red Sea and Suez Canal have raised freight and raw material costs, suggesting a possible loss of momentum in the coming months.

GDP growth projections for Saudi Arabia and the United Arab Emirates have been revised to 2.1% and 4.4%, respectively, from 4.4% and 4.8% three months ago. These adjustments reflect the strength of the non-oil economy and the gradual easing of oil cuts starting in the third quarter. Recent data for the fourth quarter of 2023 shows a 3.7% year-on-year drop in Saudi GDP, following a 4.4% contraction in the third quarter. Meanwhile, the UAE’s non-oil GDP is estimated to have expanded by 5.6% in 2023, driving overall GDP growth of 3%.

The sharp drop in GCC oil production last year, as a result of the introduction of oil cuts, set a very low base. Even with the OPEC+ group’s voluntary extension of production cuts into the second quarter, the regional energy sector is poised for growth this year. The report forecasts a cumulative expansion of energy sectors of 1.3%, a notable change from last year’s 5.7% decline. In Saudi Arabia, specifically, oil activities are expected to grow 0.7% this year after a 9.5% year-on-year drop in 2023.

The GCC’s non-energy sectors are poised to continue benefiting from public and private investment. Saudi Arabia is driving Vision 2030 by allocating funds to giga and mega projects and focusing its attention on Expo 2030 and the 2034 FIFA World Cup. Investment activity is also expected to be strong in the UAE as plans are planned around ‘We the United Arab Emirates 2031’, Dubai Economic Agenda D33and other strategies are implemented. Meanwhile, Qatar’s plans for LNG capacity expansion in the latter part of this decade are expected to have a positive impact in the medium term.

Hanadi Khalife, Middle East Director, ICAEWsaying:

“Even as the GCC’s economic prospects face increasing headwinds due to the war in Gaza and disruptions to trade in the Red Sea, we are encouraged by the resilience of non-energy sectors to drive recovery. The unwavering commitment of the UAE and Saudi Arabia to diversify their economies beyond oil and meet ambitious deadlines speaks volumes about their pragmatic and fiscally prudent approach. Initiatives such as the Kingdom’s overseas bond sales to address fiscal deficits and the removal of the UAE from the Financial Action Task Force (FATF) gray list will enhance both countries’ reputations and help attract more foreign investment. direct.

Scott Livermore, economic advisor at ICAEW and chief economist and managing director at Oxford Economics Middle Eastsaying:

“The Middle East faces increasing pressures: most economies are set for a slowdown and regional fiscal policies remain relatively unfavorable this year. However, Saudi Arabia’s successful raising of $12 billion in its largest bond sale since 2017 indicates market confidence in the Kingdom’s credit worthiness. This issuance covers approximately half of the projected borrowing needs for the year as the government continues spending on diversification projects.”

The tourism sector will remain key to the growth agendas of Saudi Arabia and the United Arab Emirates: Dubai International Airport welcomed 86.9 million passengers last year, above pre-pandemic figures, and airports The Kingdom welcomed 106.2 million visitors last year, 12% more than in 2022.

The report also predicts GCC inflation will be around 2.5%, driven mainly by housing costs. Positive inflation trends have eased concerns about additional rate hikes by the Federal Reserve and GCC central banks. The first cut is expected to occur in the second quarter and interest rates will gradually decline thereafter. A more flexible monetary policy will help stimulate regional credit growth and boost the real estate sector, supporting domestic investment.