Gulf economies on solid growth track with GDP growth in 2018 expected to expand at the fastest rate since 2015
March 22, 2018 UAE: According to ICAEW's latest report (Economic Insight: Middle East Q1 2018), 2018 marks a turning point for Middle East economies, allowing recovery for both oil exporters and oil importers.
Overall, the Middle East's GDP is expected to grow 2.9% this year, up from 1.1% in 2017.
However, the accountancy and finance body says the political environment remains challenging and continues to pose a downside risk to headline growth.
Economic Insight: Middle East Q1 2018, produced by Oxford Economics, ICAEW's partner and economic forecaster, says the region's overall economic outlook looks positive this year and in 2019, thanks to the rising oil prices (forecast at US$67 per barrel this year), expansionary fiscal policy and relative improvements in the overall security conditions.
Economic activity is expected to pick up for oil exporters driven by two main factors, rising oil prices and increased government spending.
Overall, GCC's GDP is expected to grow to 2.4% this year, up from 0.1% last year. And in 2019, as OPEC phases out its output cut, GDP growth is expected to accelerate further for oil exporters.
The outlook is similarly positive for oil importers in.
Lebanon's GDP is expected to accelerate to 2.7% in 2018 from an estimated 1.8% in 2017, boosted by public infrastructure investment and trade and tourism recovery.
While in Jordan, the kingdom's GDP is expected to have marginal growth of 2.5% this year, up from 2.3% in 2017, mainly due to improving external demand and a positive outlook from its main trading partners.
Mohamed Bardastani ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Middle East economies are recovering from the difficult years of a low oil environment, various austerity measures and geopolitical risks.
But more reforms are required to address the fundamental problems that have plagued so many countries of the region for so long, including reducing high unemployment rates, promoting fair competition and better regulation, investing in talent and strengthening women's legal rights.”
Saudi Arabia enters a new era
Saudi Arabia is undergoing various fundamental economic and social changes.
For the first time, Saudi citizens are paying 5% VAT on goods and services, a sweeping anti-corruption crackdown generated more than US$100bn for the Saudi government, cinemas are expected to open as soon as March, and Saudi women will be permitted to drive from June.
Real GDP is expected to rebound to 2% growth in 2018, after contracting by 0.7% last year, underpinned by expansionary fiscal policy and recovery in oil prices.
The oil sector contracted by 3.0% in 2017, primarily due to the OPEC deal that saw Saudi Arabia cut supply by about 0.5m barrels per day.
The extension of the OPEC deal until the end of 2018 will cap oil sector growth, which is expected at 1.1% this year. However, recovering oil prices and the opening of Jizan refinery this year will improve the overall outlook.
The non-oil sector is expected to grow 2.6% in 2018, thanks to various pro-growth government initiatives.
The Saudi government announced the largest ever budgeted expenditure, including a 14% year-on-year increase in capital expenditure.
Budget spending will also be complemented by the release of state funds amounting to SAR50bn from the National Development Fund and up to SAR83bn from the Public Investment Fund.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “The outlook for Saudi Arabia's economy looks positive thanks to reforms and rising oil prices.
However, various challenges remain such as rising living costs for households and higher input costs for businesses.
Sustainable and effective countermeasures would mitigate the adverse impacts.”
Household spending will be weighed down by the 5% VAT and rising living costs as a result of higher electricity tariffs and gasoline prices introduced in January.
Inflation is expected to reach 4% this year, up from -0.3% in 2017.
For businesses, levies on expat labour and rising input costs pose additional challenges.
While on the monetary policy side, the expected three rate hikes in the US this year will translate into higher interest rates in Saudi given the US dollar peg – this would raise the cost of borrowing for businesses and consumers alike.
Critical phase for Oman
Oman's economy looks brighter, with the main boost coming from higher oil prices and ramp-up in gas output, which will boost government and private sector incomes and lift confidence.
The country continues to push ahead with the process of economic diversification (Tanfeedh) but the economy remains highly reliant on oil revenue, which makes up 70% of the budget.
As a result, the fiscal position remains a key vulnerability – the government missed budget deficit estimates for the second consecutive year in 2017, but higher oil prices facilitate a more expansionary stance in 2018, even as Oman's VAT launch is delayed until 2019. Overall, Oman's GDP is forecast at 3.6% this year, up from just 0.2% in 2017.
“Oman's economy looks positive in the short term but more efforts are needed in order to build a sustainable economy.
There are real opportunities in the non-oil sector, especially in the tourism sector.
But the continuing absence of a clear succession plan is worrying,” said Maya Senussi, ICAEW Economic Advisor and Senior Economist for Oman at Oxford Economics.
The report also warns about the high unemployment rate which currently stands at around 17% (the region's highest).
The Oman government has to fix the underlying drivers of unemployment, particularly among the youth, with skill mismatch continuing to be a major hindrance.
Household spending power is expected to remain constrained, particularly for low-income earners.
Petrol price increases after subsidy removal, and impending excise taxes will pose a drag on purchasing power in 2018 as inflation rises.
The report also expects the following GDP growth in Middle Eastern economies:
|GCC + wider Middle East