MANAMA: Booming oil prices and rising output are set to drive stronger economic growth this year in the GCC, despite a darkening global landscape as market pressures mount and uncertainty heightens.
As per the latest Economic Insight report for the Middle East, commissioned by the Institute of Chartered Accountants in England and Wales (ICAEW) and compiled by Oxford Economics, the forecast for GCC economies has been revised higher for 2022, to 6.1 per cent (1.3ppt above the projection three months ago) amid much stronger prospects for the oil sector and extensive investment initiatives focused on diversification.
According to the report for Q2, Middle Eastern countries are having to adjust to pressures stemming from the ongoing Russia-Ukraine conflict, China’s economic slowdown and the tightening of global market conditions.
However, the rise in oil prices has provided strong support to the macroeconomic environment across the Gulf, which is being used to offset the impact of rising inflation and supply chain disruptions to regional commodity importing countries.
The higher income from hydrocarbons means that all six GCC nations will likely post budget surpluses, despite rising expenditures.
However, the report says this is unlikely to have impact on spending plans, with most of the windfalls earmarked for debt repayments, which should see debt-to-GDP ratios decline across the region.
Non-oil growth also continues to show strong signs across the GCC and ICAEW’s 2022 forecast for GCC non-oil activity stands at 4pc, rising from 3.4pc three months ago.
Rising commodity prices, caused by the Russia-Ukraine conflict, have buoyed the GCC’s fiscal and external balances but have subsequently caused inflation rates to increase.
ICAEW predicts GCC inflation to average 3.1pc this year (forecast was 2.7pc three months ago), up from 2.3pc in 2021, before falling back to 2.5pc in 2023.
The GCC’s US dollar currency pegs have meant the region’s monetary authorities have been forced to follow the US Federal Reserve rate increases in March and May.
The Federal Reserve has displayed intent to tame the significantly high inflation in the US, with rate increases expected to total 2.5 percentage points this year.
The resulting rise in financing costs may dampen the non-oil recovery in 2023 but it should not pose an immediate risk to the region’s growth or continued expansion.
Scott Livermore, ICAEW economic adviser, and chief economist and managing director of Oxford Economics Middle East, said: “The GCC economy has seen an impressive bounce-back from the disruption caused by the Covid-19 pandemic and has appeared steady despite global headwinds from prolonged market instability.
“Growth in the oil sector has largely been the driver of the region’s success, although Saudi Arabia recently gestured its willingness to help control rising oil prices, “an indication that the region is concerned about the impact of a recession in key economies.”
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