GDP Growth Seen Slowing Down in GCC as Oil Output Cuts & Tighter Policy Take Toll

The pace of GDP growth in the GCC region is expected to more than halve to 2.8 % this year from 7.5 % in 2022 amid prevailing global challenges, according to a new report.

The latest Economic Insight Report for the GCC, commissioned by ICAEW and compiled by Oxford Economics, has revealed that GCC economies will expand moderately in 2023 as energy output growth slows markedly and high inflation and greater borrowing costs weigh on demand and economic activity.

According to the report, the slowdown in GCC will become more pronounced as oil production cuts and tighter policy take their toll. The latest Purchasing Manager’s Index (PMIs) show the GCC entered 2023 with strong momentum, supported by healthy demand and sentiment, even as slower global growth weighs on export orders.

ICAEW’s oil price estimates have also been lowered, with Brent crude forecast now seen averaging US$85 per barrel this year, against the forecast of US$92.1 three months ago. Oil prices have been weighed down by continued strength in the dollar and concerns about projections for global demand, though China’s surprise reopening following the pandemic lockdowns has offset some of the downward pressure.

OPEC countries have kept to the production targets agreed in November and, barring significant tightening in the oil market, ICAEW expects the quotas to be maintained in the group’s next meeting in April and likely beyond.

The report said that OPEC policy is again weighing on GCC energy output growth which is expected to slow to just 0.5 % in 2023. The oil sector was the key driver behind last year’s exceptional GDP performance, rising by 11 %, led by production gains in larger GCC producers.

Non-oil growth remains resilient

ICAEW said travel and tourism sector will remain supportive of non-oil activity in most GCC countries. It said, ‘Recovery in inbound travel is expected to continue this year, as countries invest in tourism development opportunities. That said, a full recovery to 2019 levels isn’t likely until 2024, particularly as the stronger dollar has made the region more expensive for visitors.’

GCC countries’ budget spending is expected to provide crucial support to the non-oil sectors this year, ICAEW found. Given the dependence of regional budgets on oil and gas revenues, their financial positions improved considerably in 2022.

Scott Livermore, chief economist and managing director of Oxford Economics Middle East, said, “With oil sector gains exhausted, non-oil activity is again leading the GCC recovery. The overall picture painted by the latest PMIs is positive, helped by strong sentiment and contained price pressures.”

Even though oil prices have softened in recent months, they remain above most GCC countries’ fiscal break-even levels, allowing most governments to generate enough revenue to keep budgets in surplus. A surplus of about 5 % of GDP for the GCC region as a whole, similar to 2022, is expected, according to ICAEW estimates.

Hanadi Khalife, head of Middle East, ICAEW, said, “Continuing to increase investment in the non-oil sectors will not only help the GCC countries to remain resilient this year, but will be vital in achieving the net-zero pledges which, for many, sit at the heart of their economic visions.”

However, stickier-than-expected inflation remains a key risk to non-oil activity, the report noted. ‘Average inflation rates in GCC are generally moving down, amid a decline in global commodity prices, but there are several country-specific factors at play, including a post-World Cup reversal in inflation trends in Qatar and a high starting base from the doubling of VAT rates in Bahrain,’ it added.

Meanwhile, economic resilience in the US will necessitate more rate hikes by the US Fed and most central banks across the GCC are expected to follow suit, even as regional inflationary pressures ease.

‘The effects of aggressive policy tightening over the last 12 months will continue to filter through to economic activity, underpinning the view of non-oil GDP growth in the GCC slowing to 4 % this year from 5.7 % in 2022,’ ICAEW added.