Economic Update: Oil output cuts constrain the pace of recovery

• GCC: Non-energy growth remains resilient despite oil output cuts
• Qatar: Data point to a mild recovery
• Bahrain: Economy is set for recovery

GCC: Non-energy growth remains resilient despite oil output cuts

• Our 2024 Middle East forecast has been nudged down by 0.1pp, to 2.1%
• Non-energy sectors remain the engine of GCC growth
• Geopolitical factors pose downside risk to the outlook

Our baseline assumes a steady but unspectacular recovery in global economic activity this year, with the pace of global GDP growth seen at 2.6%, 0.2pp up on our projection three months ago and set to pick up slightly to 2.8% in 2025. At a regional level, we anticipate a more gradual economic recovery in the Middle East than three months ago and have downgraded our GDP forecasts for both this year and next. We now expect Middle East GDP will grow 2.1% this year (0.1pp down on three months ago) and 3.7% in 2025 (0.9pp less than previously). Geopolitical factors – stemming from both regional conflicts, particularly Israel-Gaza/Iran, and global developments, including a possible second President Trump presidency – are the main risks to the outlook.

We have cut our forecast for GCC growth this year to 2.2% (from 2.7% three months ago) to incorporate another extension of oil production curbs. Oil output cuts mean that the energy sectors will be a drag on economic growth this year, however the outlook for the non-energy sectors remains robust. The PMIs remain firmly in expansionary territory, underpinned by strong domestic activity, with business sentiment running high despite some upward pressure on costs. Full 2023 GDP growth data remain pending in several countries, but we estimate the GCC economy grew 0.6% last year.

Despite the global economy proving relatively resilient, OPEC+ discipline in curtailing production and ongoing regional tensions, oil prices have struggled to remain above $80pb. In early June, OPEC+ announced that it would extend oil output cuts through Q3, before gradually phasing them out from October until the end of 2025. Our 2024 Brent crude oil price is modestly higher than three months ago, at $82.1 ($79.3 before), but we expect prices to edge below $80 in 2025 and beyond.

The extension by the OPEC+ group of voluntary output cuts through Q3 implies a delayed recovery in the GCC energy sectors. GCC oil output will now shrink by 2.6% this year (we saw a 1.3% expansion three months ago), following a decline of 5% in 2023. In Saudi Arabia specifically, which is curtailing production to the greatest extent, we see oil activities contracting by 5% this year (we estimated growth of 0.7% three months ago) after a 9.1% y/y plunge in 2023. We expect the energy sector to make a positive contribution to Saudi and GCC growth in 2025 as voluntary production cuts are reversed.

High frequency data paint a positive picture of the outlook for the non-energy sectors, so we continue to expect broad-based non-energy growth across the GCC. In Saudi Arabia, sectors which are key for the completion of the giga-projects, including construction, manufacturing and transportation, will likely garner the largest share of investment. We also see strong momentum in the sports and entertainment sector as the country’s transformation continues, as well as the hospitality sector, with tourism remaining key to the Saudi growth agenda. Tourism is a strategic sector in other countries too and will remain a key growth driver. Tourism activity has rebounded strongly since the pandemic, with visitor numbers hitting records across the GCC in 2023 and the positive momentum continuing this year.

Our view is that non-oil economies will continue to grow despite the GCC’s fiscal positions deteriorating. The oil price level is currently below a fiscal breakeven – ie, the oil price that balances the budget – in a number of countries in the GCC, including Saudi Arabia and we expect Saudi Arabia as well as Bahrain and Kuwait to see budget deficits this year and next. That said, the aggregate GCC budget position will likely remain in surplus. Moreover, the overall financial position of most countries in the GCC is strong, reflected in favourable credit ratings, which allows them to access funding through capital markets and IPOs. In Saudi Arabia, the sovereign wealth fund – Public Investment Fund – is central to funding the development plans.

We have lowered our 2024 inflation forecast for the GCC by 0.3pp, to 2.2% this year, and expect it to slow to 2.1% next year. Excluding housing rents in some countries, notably Saudi Arabia, inflationary pressures remain contained with inflation readings comparing favourably with global levels. Latest readings show inflation is below 2% in all GCC countries except Kuwait and the UAE.

GCC central banks tend to track policy rates of the US Federal Reserve given the exchange rate pegs against the US$. We anticipate the Federal Reserve will begin to cut policy rates in September, later than we thought three months ago. We expect a gradual pace of cuts thereafter for a total of 150bps by the end of 2025, but see the risk to our forecasts skewed to the upside. If US services inflation remains elevated, a prolonged pause in 2025 is plausible, potentially dampening the recovery in private investment in the region.

Geopolitical risks remain a major headwind to the outlook for the rest of the Middle East. In Iran, following the unexpected death of the president, elections will take place on 28 June. We think they are unlikely to change the direction of policy, although some disruption to near term oil supply is possible. Our baseline assumes Iran's oil production and output continues to grow this year but at a slower pace, underpinning GDP growth of 1.8%. In Lebanon, we've more than halved our 2024 GDP growth forecast to 0.8% from 2.2%, to reflect the toll on the Lebanese economy from the fighting between Hezbollah and Israel. In our baseline, we assume Lebanon will avert a full-scale war, containing the economic fallout. But we consider risks to the outlook are skewed to the downside as the fears of the conflict spreading weigh on the pace of recovery. The economy has been in decline for six years. For Jordan, we forecast 2024 GDP growth of 2.1%, down from 2.6% in 2023, expecting the disruption in tourism to weigh on the performance of other sectors linked to the tourism industry.

Qatar: Data point to a mild recovery

• Economy slowed in 2023 but should grow by 2.2% this year and 2.9% in 2025
• Inflation will average 1.6% this year and 2% in 2025
• Budget surpluses will remain above 5% of GDP, the largest among GCC peers

Our 2024 GDP growth forecast for Qatar stands at 2.2% and we expect the economy to expand by 2.9% next year. The forecasts reflect our expectations of stronger expansions in the energy and non-energy sectors than in 2023, when we estimate the economy grew by 1.1%. Growth will remain significantly weaker than in 2022, when the economy expanded by 4.2%, boosted by the World Cup.

On the energy side, Qatar's oil output has been relatively flat in recent years at around 600,000 barrels per day. As the country is not involved in the OPEC+ pact on production quotas, we expect production to rise modestly this year. A recovery in oil production will boost the energy sector to 1.7% growth this year, up from an estimated 1.5% expansion in 2023. Commodity prices have eased but are still elevated, supporting the macroeconomic environment.

The gas sector is a priority. The authorities have doubled down on the North Field gas expansion project, which will have a positive medium-term impact. The target liquefied natural gas (LNG) capacity was raised to 142mtpa (million tonnes per year) by the end of 2030, up nearly 85% from the current 77mtpa and 13% on the intermediate target of 126mtpa by 2027. The new North Field West project is in the early stages. Last year, Qatar awarded a US$10bn contract for the second phase of the project, North Field South, which will include the delivery of two LNG trains.

Qatar is also making progress in contracting future gas output. The government recently signed a 20-year supply contract with India for 7.5m tonnes of LNG annually and a 27-year contract with Taiwan for 4m tonnes. It followed similar deals with China, France, Germany and Hungary, with more likely in the coming months.

On the non-energy side, the outlook is turning rosier, amid the continued improvement in demand and business expectations, which should benefit job creation. The PMI rose to 52 in April, the highest since September 2023, signalling a rebound in activity. The improvement was broad-based and supported by stronger demand, particularly in services. The uptick follows a few soft quarters; recently reported GDP data showed the non-energy economy grew by 0.6% y/y in Q3 2023, with overall growth of 1.2% y/y in the same period. We project non-energy growth at 2.5% this year, up from an estimated 0.8% in 2023.

Tourism has provided a key support to non-energy activities and will remain a driver of future growth. Data show foreign arrivals above 1.6m in Q1, a third of the way to our forecast of 4.5m overnight visitors this year. Hamad International Airport has recently been named the world's best, which should extend the positive momentum in tourist traffic.

We project a 2024 budget surplus above 5% of GDP, similar to last year. Budget data for Q1 showed the quarterly surplus at QAR2bn, slightly wider than in Q4 2023, but a fraction of the outcome in Q1 2023. Revenues fell by 22.1% y/y, despite a 17.4% y/y rise in non-energy income. Meanwhile, spending rose by 5%, lifted by a 9% y/y increase in current expenses. Fiscal rectitude and expectations of steady surpluses have been recognised in successive credit rating upgrades. Qatar's AA credit ratings are now back to the highs reached before the country's dispute with its Gulf neighbours in 2017.

Qatar became the first GCC sovereign to issue green bonds, despite being the only one lacking explicit net-zero targets. The country raised $2.5bn in a double-tranche, oversubscribed transaction in May, returning to external debt markets for the first time since April 2020. Our 2024 inflation forecast is at 1.6% and we see price growth averaging 2% in the medium term. Annual inflation slowed to just 0.7% in April, the lowest since March 2021. Prices in housing and utilities and restaurants and hotels eased relative to March, consistent with survey-based data, which point to inflationary pressures cooling. We project the US Federal Reserve – and hence, Qatar's central bank – will cut rates in September for a total of 150bps by the end of 2025.

Our 2024 inflation forecast is at 1.6% and we see price growth averaging 2% in the medium term. Annual inflation slowed to just 0.7% in April, the lowest since March 2021. Prices in housing and utilities and restaurants and hotels eased relative to March, consistent with survey-based data, which point to inflationary pressures cooling. We project the US Federal Reserve – and hence, Qatar's central bank – will cut rates in September for a total of 150bps by the end of 2025.

Bahrain: Economy set for recovery

• Economy seen growing 3.1% this year with positive contribution from both oil and non-oil sectors
• Financial sector now contributes more than oil to the economy
• Persistent budget deficits underscore the need for fiscal adjustments

We expect Bahrain’s economy to grow by 3.1% this year, above the average pace in the last decade, but see the pace easing to 1.4% in 2025. Bahrain’s growth was very strong at 5% in 2022, in line with regional trends, before slowing to 2.4% last year amid headwinds from the oil sector and tighter monetary policy.

In the face of global headwinds, Bahrain remains committed to fostering economic resilience and diversification efforts to mitigate its reliance on oil revenues. Last year, growth was primarily driven by the non-oil sector, which grew by 3.4%, accounting for nearly 84% of GDP.

Bahrain has seen significant investment growth, with major projects announced throughout last year following the launch of the Golden License initiative in April 2023. The scheme requires a minimum investment of US$50m and creation of at least 500 jobs. Bahrain has attracted $2.4bn thanks to the initiative via nine projects with investors from Morocco, the UAE, Jordan, Egypt, Kuwait and Switzerland to strengthen non-oil sectors. Bahrain’s economy is already the most diversified in the GCC region, with the financial services sector contributing the most to GDP in 2023 at nearly 18%, surpassing oil which contributed 16%.

We anticipate ongoing growth in the non-oil economy, aligning with the Bahrain Economic Vision 2030 and COP28 commitments to reduce carbon emissions by 30% by 2035. We forecast the non-oil economy to grow by 3% this year and 1.5% in 2025.

Bahrain’s oil production has risen slightly this year but still remains below 200,000 b/d on average. This underpins our forecast of a model rise in oil-sector GDP after four years of modest declines. In the medium-term, the oil sector’s contribution to growth will be limited by constraints on production capacity, estimated at around 210,000 bpd, with little potential for growth. A recent oil-field discovery could help Bahrain’s fortunes, but it is not clear when the field will be operational.

At $80, Brent oil prices are markedly below Bahrain's estimated fiscal breakeven price of $125.70 per barrel. Given that oil and gas exports provide about two-thirds of government revenue, the lower oil price this year will offset gains from higher oil production, underpinning our budget deficit forecast of 2% of GDP this year, with a similar outcome seen in 2025. The government will likely delay the zero-deficit target from the Fiscal Balance Program beyond this year. Persistent deficits underscore the need for fiscal adjustment, with the debt/GDP ratio at 93% in 2023, the highest among GCC peers.

Despite budget pressures, the government recently allocated BD200m ($500m) from the unemployment insurance fund towards elevating minimum wages and improving workforce training initiatives. The initiative aims to tackle youth unemployment; the overall unemployment rate remained healthy at 1.3% in 2023 and we think it will fall to 1.1% in 2024.

Bahrain's inflation is among the lowest in the GCC region, hovering around 1%, up from an average of 0.1% last year, indicating minimal inflationary pressures and making the economy favourable to consumer and business confidence. We expect prices to increase by 1.8% this year and rise to 2.1% in 2025. Despite benign inflation, we expect interest rates to remain elevated this year at an average of 5.9%, weighing on private consumption spending this year. The Central Bank of Bahrain is braced to implement the necessary measures to preserve monetary and fiscal stability.