GCC Region Set for Fastest Growth & Largest Surplus on Higher Oil Prices

The combined GDP of six GCC countries is expected to grow by 6.7% this year, the fastest growth rate since 2011, thanks to higher oil prices and increased production in the energy-rich region.

A latest Economic Insight report, commissioned by ICAEW and compiled by global advisory firm Oxford Economics, revealed a positive regional economic outlook despite a significant downgrade in global GDP growth against a backdrop of rising inflation and interest rates.

The Middle East economic growth in 2022 is now projected at 5.5%, slightly up on Oxford Economics’ forecast three months ago. The positive outlook is underpinned by solid projections for activity in the GCC economies.

‘GCC GDP is expected to grow by 6.7% this year, the fastest rate since 2011, driven by higher oil production, the recycling of government revenues into investment initiatives and, to a lesser extent, household and business spending,’ Oxford Economics said. However, the possibility of a global recession limiting oil demand remains a key downside risk to this view, it added.

Similarly, the International Monetary Fund has also projected GCC economic growth at 6.4% for 2022.

Oil prices remain supportive of GCC public finances and are expected to contribute to an overall budget surplus of 9.7% of GDP for the GCC region, the widest since 2012, according to Oxford Economics. It expects oil prices to average at US$103.8 per barrel for 2022.

‘This should drive a decline in the debt-to-GDP ratios since much of the GCC retains plenty of fiscal headroom. Fiscal break-even prices (as estimated by the IMF) are below US$80 per barrel in all GCC countries except Bahrain, suggesting economic growth across the region will remain robust in the coming quarters,’ Oxford Economics report said.

Inflation remains muted

Inflation slowed in July in Oman, Kuwait and Qatar, thanks to easing food prices, though it edged up in Bahrain and Saudi Arabia. ICAEW and Oxford Economics predict GCC inflation to average 3.1% this year, up from 2.3% in 2021, before falling back to 2.7% in 2023.

As the US Federal Reserve continues its rate 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, GCC policy rates tend not to fall too far out of step with the US, which are expected to continue hiking until early 2023. Given supportive energy and fiscal trends, higher borrowing costs will gradually drag down demand and growth, with the impact being felt more in 2023,’ the report said.

Mark Billington, ICAEW managing director – international, said, “While oil continues to buffer GCC economies, the looming possibility of a recession in the US and Europe reinforces the importance of accelerating economic diversification efforts. Fortunately, current indicators measuring the region’s non-oil performance point to ongoing strength, even as inflation remains high.”

Scott Livermore, chief economist and managing director at Oxford Economics Middle East, said, “The Middle East is withstanding global economic pressures, but the broader outlook is challenging. The windfall from an increase in oil prices has seen markets like Saudi Arabia boom. However, with the OPEC+ alliance likely to cut production as the demand outlook weakens, such growth cannot be sustained without more diversification.”

“Continued re-investment of budget surpluses into public projects, increasing non-oil trade and new fiscal policy should help shield the GCC economies from the worst of the recessionary tension,” he added.

According to ICAEW and Oxford Economics report, travel and tourism activity in the GCC countries has gathered momentum, shrugging off the impact of strong dollar-pegged regional currencies and underpinning non-oil recovery.

It said inbound travel to the region is outpacing global trends, in part thanks to major international events in the region in 2022, including the forthcoming FIFA World Cup in Qatar, which hopes to attract 1.5 million visitors.