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The Gulf Cooperation Council (GCC) countries are expected to expand moderately this year, according to the latest Economic Insight report, commissioned by the accountancy and finance body ICAEW and compiled by Oxford Economics.
However, the anticipated pace of 2023 GDP growth in the region dropped to 1.9% in Q2, down from 2.8% in the previous quarter, due to the slowdown in energy output.
Although growth expectations for the GCC have been revised downwards for this year, the region’s latest survey indicators reflect ongoing strength.
The Q2 report reveals a slight easing in the pace of expansion since the start of the year. However, strong domestic demand continues to drive growth in employment and new orders.
ICAEW’s revised oil price estimates now anticipate Brent averaging $81.5 per barrel this year, down from the previous forecast of $85 per barrel three months ago, while heightened concerns about global demand have prompted deeper production cuts from Opec+ countries.
In the June meeting, Saudi Arabia voluntarily agreed to a 1mb/d production cut for the month of July, which may result in a tighter market in the latter half of the year.
The updated Opec+ agreement implies a greater drag on GCC energy output growth this year, weakening it by 2.1%. While the UAE is expected to experience a rise in production next year, due to a higher supply ceiling aligning with current capacity, most countries in the region are likely to witness stagnation in the sector in 2024.
Non-oil sectors will continue to lead the GCC recovery, projected to grow 3.9% this year, likely reflecting a resilient domestic market. The travel and tourism sector is also recovering strongly, with Dubai Airport expecting passenger numbers to exceed 2019 levels this year.
The stimulus from tourism, along with a surge in population and support from the government, are reflected in the UAE’s overall economic growth and resilience to global economic headwinds.
Meanwhile, Qatar welcomed 1.16 million tourists in Q1 – the second highest number on record – and remains on track to lift the total number of visitors to 2.9 million this year, from 2.55 million in 2022.
According to the Q2 report, Bahrain’s GDP growth will decelerate to 2.2% this year, likely caused by a slowdown in global activity, lower oil prices and the easing in tax receipts. This follows the fast-paced growth in 2022, with Bahrain’s economy expanding by 4.9%, the fastest in nine years.
The kingdom’s economic growth last year was primarily driven by the doubling of VAT rate, rising to 10%. Excluding the tax effect, the economy expanded by 3.3%, driven by Bahrain’s non-oil sector, including government services, the finance sector and manufacturing, stated ICAEW in the report.
The country’s oil sector did not perform as strongly, shrinking 1.4% year-on-year, despite a 7.8% year-on-year increase in production and a sharp rise in global oil prices, it added.
The resumption of direct flights between Qatar and Bahrain after a six-year break will reinforce the positive dynamics in the tourism and hospitality sectors.
More broadly, FDI inflows are expected to strengthen as geopolitical risk within the Middle East eases, including an agreement to re-establish ties between Saudi Arabia and Iran.
While there have been no changes to regional VAT regimes this year, the UAE began to levy corporate tax at 9% from 1 June. Companies that contribute to the wider public benefit are generally exempt, as are businesses in free zones and investment funds.
The exemptions aim to enhance the flexibility of the new tax programme and ensure a supportive business environment. This flexibility and relatively low tax rate could keep the overall economic impact to be modest.
Hanadi Khalife, Head of Middle East, ICAEW, said: “While the region’s growth might be slowing down, investments in non-oil sectors are proving critical to Gulf countries’ ability to withstand global economic pressures. Continuing to diversify and increase investment in these sectors, in line with the visions of most countries, will enable the GCC to maintain its consistent growth trajectory.”
Scott Livermore, ICAEW Economic Advisor, and Chief Economist and Managing Director, Oxford Economics Middle East, said: "Although oil prices remain above most countries’ fiscal breakeven levels, their softening and OPEC+ cutting production quotas has increased the urgency to diversify revenues away from the oil sector."
"For now, the only two countries we have Q1 budget data for are Saudi Arabia and Oman – both of which have been successfully minimising the hit to public finances from oil sector dynamics by generating higher non-oil revenues," he added.
Inflation data in the region indicates easing price pressures with inflation being the lowest in Bahrain and Oman (0.7% and 1.2%, respectively) and Qatar dropping from its highest rate last year to 3.7%.
Domestic price pressure on the other hand is now a major driver of inflation, particularly in Saudi Arabia, where rental prices are rising at a record pace. The report lifted its 2023 GCC inflation forecast by 0.3pp to 2.7%, which is still down from 3.3% in 2022.
Given the GCC central banks largely mirrored the US Federal Reserve’s rate hikes this year, interest rates are expected to remain at their current elevated levels for the remainder of the year. A stronger labour market and inflation data could provide a case for further tightening by the US Fed in the coming months, stated the ICAEW report.
However, the US Fed is still expected to start cutting rates next year, allowing easing in regional monetary policy, albeit with caution. This means non-oil GDP growth in the GCC will likely continue to slow from an estimated 3.9% this year to 3.7% in 2024, it added.-TradeArabia News Service