THE Middle East economy faces a deeper contraction this year than during the first year of the Covid-19 pandemic, as regional war delays recovery despite an interim US-Iran agreement, reveals a new report.
Middle East GDP is projected to shrink by 4.1 per cent in 2026, according to the ‘Economic Insight: Middle East Q2 2026’ report by ICAEW and Oxford Economics, reversing pre-war projections of a 3.6pc expansion following the outbreak of conflict in February.
The report forecast a 2.4pc contraction for the GCC bloc in 2026. However, a rapid 8.1pc rebound is expected in 2027 as trade routes normalise, travel demand returns, and business confidence rebuilds, supported by a formal US-Iran peace agreement expected to be signed tomorrow.
The conflict severely disrupted infrastructure, cutting May oil production nearly in half from pre-war levels. Rerouting via Saudi Arabia’s East-West Pipeline and the UAE’s Habshan-Fujairah link prevented a larger collapse. Still, GCC oil output will contract by 14.5pc this year – the steepest decline in decades – before staging a 23.5pc rebound in 2027.
Brent crude is expected to average $90 per barrel this year. In the medium term, prices could face downward pressure as the UAE expands its pipeline to Fujairah to double export capacity, following its departure from Opec+ to target 5 million barrels per day once trade normalises.
Saudi Arabia and Oman remain the most resilient GCC economies and will escape overall contraction this year, with Oman logging a budget surplus. Saudi Q1 GDP contracted 1.2pc quarter-on-quarter as oil activities dropped 6.8pc, though non-oil activity edged up 0.3pc.
May PMI surveys for Saudi Arabia and the UAE hit a three-month high on resilient domestic demand, though export orders remain weak. Overall, GCC non-energy sectors will contract by 1.1pc this year before recovering in 2027.
Tourism has taken a direct hit, with inbound GCC arrivals projected to plunge 30pc in 2026, causing billions in lost spending. While recovery will take longer than energy, the region’s infrastructure preserves medium-term growth prospects. In Dubai, real estate faces pressure with drops in mortgage and cash sales, but expatriate flight risks remain low as high-frequency data shows most departed workers have returned.
Public balance sheets are under significant strain. Saudi Arabia’s Q1 budget deficit more than doubled to around $33.5 billion – roughly 9 per cent of GDP – due to lower oil revenues and high Vision 2030 spending. Disruptions also brought Qatar’s oil and gas revenues to a standstill, causing its largest deficit since 2017.
However, GCC funding risks remain contained. Despite the challenges, Bahrain successfully raised $1bn in an oversubscribed sovereign bond sale this month – the region’s first since the war began – backed by implicit support from Saudi Arabia and the UAE.
Driven by food costs, 2026 GCC inflation was revised up to 2.6pc before an expected drop to 2.1pc in 2027. Regional central banks are projected to mirror the US Federal Reserve in keeping interest rates on hold until December.
“Governments moved quickly, alternative trade routes were activated, and domestic demand has held up better than expected,” said ICAEW regional director for MEASA Hanadi Khalife. “The recovery projected for 2027 is substantial.”
Oxford Economics head of GCC macroeconomic analysis Azad Zangana added: “The damage is concentrated in energy and tourism. But the recovery in our baseline is rapid, pointing to a region well-positioned to rebound as trade routes reopen.”
avinash@gdnmedia.bh
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