Economic expansion in the GCC will slow down in 2023 as oil production cuts and tighter policy take their toll, according to a new assessment by chartered accountants.
The latest Economic Insight report for the GCC, commissioned by Institute of Chartered Accountants in England and Wales (ICAEW) and compiled by Oxford Economics, has revealed the region will expand moderately in 2023 amid global challenges.
The pace of GDP growth in the region is expected to more than halve to 2.8 per cent this year, from 7.5pc last year as energy output growth slows markedly and high inflation and greater borrowing costs weigh on demand and economic activity.
Despite the slowdown, ICAEW’s estimate for the GCC is slightly higher than the 7.1pc expansion in 2022 and 2.5pc in 2023 it reported three months ago.
This is due to stronger growth performance at the end of last year, particularly in Saudi Arabia and the UAE.
New data published recently revealed the kingdom’s economy grew by 8.7pc last year, making it one of the fastest growing economies in the world.
According to the Q1 report, the slowdown in the GCC will become more pronounced as oil production cuts and tighter policy take their toll.
The latest 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 price estimates have also been lowered, with Brent forecast now seen averaging US$85pb this year, against the forecast of $92.1pb three months ago.
Crude 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 organisation’s policy is again weighing on GCC energy output growth, which is expected to slow to just 0.5pc in 2023.
The oil sector was the key driver behind last year’s exceptional GDP performance, rising by 11pc, led by production gains in larger GCC producers.
Travel and tourism will remain supportive of non-oil activity.
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.
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. Governments approached the energy windfall with caution, using it to replenish reserves and pay down debt, with only limited increase in spending.
Even though commodity prices have softened in recent months, they remain above most countries’ fiscal breakeven levels, allowing most governments to generate enough revenue to keep budgets in surplus. A surplus of about 5pc of GDP for the GCC region as a whole, similar to 2022, is expected.
ICAEW’s Middle East head Hanadi Khalife 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.”
Adding to the comments, ICAEW economic advisor Scott Livermore, who is also chief economist and managing director at 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.”
Stickier-than-expected inflation remains a key risk to non-oil activity. Average inflation rates are generally moving down, amid a decline in global commodity prices, but there are several country-specific factors at play, including a high starting base from the doubling of VAT rates in Bahrain.
By contrast, inflation in Saudi Arabia inched higher, pushed up by rent inflation. GCC inflation is forecast to recede to 2.4pc this year, from 3.4pc in 2022, but sticky domestic price pressures, particularly from housing, will limit the pace of the decline.
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