Q3 2024: The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: Reversal of oil cuts will spur growth next year
- GCC: Growth will more than double in 2025
- Kuwait: Oil production cuts weigh on the economy
- Oman: Public finances withstand the dip in energy revenue
GCC: Growth will more than double in 2025
- Middle East GDP growth will rise to 3.8% in 2025, from a projected 2% this year
- Non-energy sectors remain the driving force of GCC growth
- Geopolitical factors are the key headwind to the outlook
We have made only minor changes to our global outlook and expect the recent period of stable global growth to extend into 2025. We forecast global GDP growth at 2.7% both this year and next. At a regional level, we expect Middle East GDP will grow 2.1% this year and 3.7% in 2025 (both unchanged on three months ago). This incorporates OPEC+ recent decision to extend caps on oil production by a further two months. We continue to view the broadening of the regional conflict in Gaza as a key downside risk to the outlook. But a breakthrough in nuclear talks with Iran seems more likely now than three months ago given the reduced probability of a second Trump administration.
We have cut our forecast for GCC growth this year to 2.1% (from 2.2% three months ago) to reflect the recently announced two-month extension of oil production curbs but see growth more than doubling to 4.4% next year as the cuts are unwound. We see a broadly steady performance of the non-energy sectors with expansion of 4.2% next year. The PMIs paint a positive picture of domestic activity, with foreign orders also boosting growth.
The extension by the OPEC+ group of oil output cuts until December implies the recovery in the GCC energy sectors will be realised next year and beyond. Meanwhile, GCC oil output will now shrink by 2.9% this year (we saw a decline of 2.6% previously). For Saudi Arabia specifically, we've downgraded this year's oil-GDP forecast from -5% to -5.4%. The fall follows a 9.1% y/y plunge in 2023, but activities should rebound strongly over the next two years. We expect the GCC energy sectors to drive regional growth in 2025-26 as countries gradually increase production.
Recent PMI readings reaffirm our positive outlook for GCC non-energy sectors, which look on track for a 4.2% expansion this year and 4.4% in 2025. Domestic momentum remains strong across the region, as highlighted by higher output in PMI surveys and the coming interest rate reductions should support both consumption and private investment. The latest estimates for Saudi GDP show real GDP contracted by 0.3% y/y in Q2, but non-oil activities rose by 4.9% y/y. Growth momentum was particularly strong in wholesale and retail trade, restaurant and hotels category, which spans the hospitality sector, which grew by 6.1%, extending strong performance from previous quarters. Saudi Arabia witnessed a rise of 65% in inbound tourism in 2023 according to Ministry of Tourism's annual statistics, with 27.4m tourists visiting. Travel and tourism continue to drive the UAE economy too. A record-high number of passengers travelled through Dubai's international airport in H1 2024. Meanwhile, Abu Dhabi and Dubai have recently been named top destinations for executive nomads, with many businesses establishing or growing their presence; the Abu Dhabi Global Markets report continued to highlight strong growth in registrations of financial companies in H1 2024. This bodes well for continued high levels of FDI and population growth.
Our fiscal forecasts are slightly weaker than three months ago. Oil revenue remains a backbone of regional budgets, so the backdrop of ongoing oil production cuts and lower oil prices has put pressure on budgets this year. We continue to expect Bahrain, Kuwait and Saudi Arabia to see budget deficits this year and next. That said, the aggregate GCC budget position will be broadly balanced this year thanks to surpluses in Oman, Qatar and the UAE before posting a small deficit of 0.4% in 2025. Despite budget pressures, we remain confident governments in the region will continue to advance diversification plans, with the countries’ sovereign wealth funds, including Saudi Arabia’s Public Investment Fund and UAE’s Mubadala, remaining strategic spenders.
We have lowered our 2024 inflation forecast for the GCC by 0.5pp, to 1.7% this year, but still expect it to rise to 2.1% next year. Recent readings show inflation is below 2% in all GCC countries except Kuwait and the UAE. In Saudi Arabia, inflation has hovered around 1.5% in recent months despite continued upward pressure from housing rents, which are seeing double-digit annual increases.
GCC central banks will follow the rate path of the US Federal Reserve given the exchange rate pegs against the US$. Our baseline forecast assumes two 25bp rate cuts in September and December and a total of 150bp by end-2025. But risks that the Fed cuts rates more than 50bps this year have risen amid softening labor market conditions and broader growth concerns.
Geopolitical risks remain a major headwind to the outlook for the rest of the Middle East. In Iran, we think the victory of Masoud Pezeshkian in the presidential race will have no meaningful impact on growth in the near term, given ongoing sanctions. But it offers the regime a chance to re-engage with the West on nuclear talks, adding upside risks to oil production growth and exports in the medium term. We forecast GDP growth of 2.9% this year and 2.6% in 2025. In Lebanon, we’ve cut our 2024 GDP growth forecast by 0.4ppts to 0.4%, as a domestic political vacuum and the threat of war between Israel and Hezbollah hang over the economy. This is offsetting the support for activity from a stable exchange rate and disinflation. And the possibility of a full-scale conflict means risks to the outlook are firmly to the downside. For Jordan, we forecast GDP growth of 2.1% this year, followed by a rise of 2.2% in 2025. We also think the ongoing regional conflict will weigh on sectors linked to tourism down. In Iraq, we halved our forecast for 2024 GDP growth to 1.8% due to the extension of the oil output cuts. Growth should rise to 3.6% in 2025 as cuts are gradually phased out.
Kuwait: Oil production cuts weigh on the economy
- Economy seen growing by just 0.5% this year before growth rises to 2.5% in 2025
- New oil discovery promises higher future oil gains
- Government budget will be in deficit this year and for the foreseeable future
Our 2024 GDP growth forecast for Kuwait is at 0.5%, reflecting ongoing oil production cuts and sluggish non-oil activity. We forecast a rebound to 2.5% in 2025-26, as production cuts are gradually unwound.
Kuwait has become the fourth GCC country to report a monthly PMI. The index was above the 50.0 no-change mark for a year and a half before dipping to 49.7 in August, which suggests a slight deterioration in business conditions. Kuwait was able to capitalise on competitive pricing which has generated new business activity for much of the year but these gains are now fading, while confidence and employment have softened. Other high-frequency indicators point to resilience in the real estate sector, while loan growth continues to rise. Domestic demand remains a key driver of non-oil sector growth, with the real estate and financial sectors providing the strongest support.
Oil production averaged 2.5 m b/d in recent months, modestly higher than the target of 2.41 mb/d implied by OPEC+ agreement. We see output averaging 2.44mb/d this year, down 6.8% on 2023. Although production cuts will be only gradually unwound, we forecast a 3% rise in output in 2025. We expect the oil sector will pick up further in the medium-term, after the OPEC+ cuts are phased out. Kuwait has announced a substantial oil discovery in the Al-Nokhatha field with an estimated reserve of 3.2bn barrels, which is roughly the equivalents of three years of Kuwait's total oil production. The discovery pushes Kuwait's agenda to expand production to 4mn b/d by 2035.
Kuwait has also made significant trade moves by exporting the equivalent of nearly 37,000 b/d of fuel oil to Saudi Arabia for the first time in over two years. The move boosts Kuwaiti exports, thereby enhancing export-led revenue and boosting the country's external accounts. The deal will also promote intra-regional trade.
Kuwait has grappled with power generation amid heatwaves, forcing the government to announce power cuts in parts of the country. The government has mitigated power challenges through short-term electricity contracts with Oman and Qatar. Kuwait recently signed another 15-year LNG supply deal with Qatar to help meet domestic power demand and plans to use the now fully functional Al Zour refinery as an import terminal. Power cuts likely contributed to downward pressure on the non-oil sector's performance during the summer period. The deal is part of a wider energy strategy, with a net zero emissions target set for 2050.
In a recent cabinet shuffle, the Kuwaiti government has appointed two new ministers in the key sectors of finance and trade. Frequent political changes have hindered the development agenda and delayed reforms, including budgetary reforms to shift from a welfare state, including via reforms to fuel subsidies, and to tap into international debt market which can encourage the non-oil sector to grow and reduce Kuwait's dependence on oil. The 2024-2025 budget aims to provide support to the private sector via the approval of 36 new projects worth US$1.4bn.
Inflation has been above 3% for most of the year, the highest in the GCC region, albeit dipping to 2.8% in June. Food and beverage prices continue to drive headline inflation, with annual increases of nearly 6%. The Kuwaiti government is taking several steps to ensure food security, with around $591mn of support allocated to essential food & construction provisions. We forecast inflation will average 3% this year, before slowing to 2.6% in 2025-26.
Oman: Public finances withstand the dip in energy revenue
- Economy set to grow by 1.5% this year, down from 3.6% in 2023
- Lower oil production volumes are a drag on growth
- Budget will remain in surplus despite weaker energy trade
Our 2024 GDP growth forecast for Oman stands at 1.5% as curbs on oil production remain in place. We still expect output to be gradually hiked, helping GDP growth to pick up to 2.3% next year. We project 2.4% growth in the non-energy sector this year, rising to 2.8% in 2025, supported by the domestic investment strategy. This is modestly above the average pace of 2.1% in the decade to 2023.
GDP data for Q1 showed the non-energy economy grew by 4.5% y/y, picking up from a soft end to last year, with overall growth of 1.7% y/y in the same period. The manufacturing sector stood out with expansion of 9.2% y/y in Q1, driven by a surge in refining output from Duqm. Services recovery also strengthened, despite weak hospitality performance.
Oman’s oil production will average 995,000 b/d this year, down 5% on last year. Oman continues to limit supply pursuant to the OPEC+ agreements. We anticipate that oil output will start to recover in December, after OPEC+ delayed the unwinding of current restrictions by two months. Meanwhile, gas production and imports rose 5.6% y/y year-to-date, with the 12-month rolling sum surpassing 55bn cubic meters for the first time. We think production will likely rise further in the coming months as more projects come online. Overall, we forecast a decline of 2.3% in the energy sector this year, followed by a rise of 0.8% in 2025.
Growth in tourist numbers stagnated in Q2 after rising by 11.8% in Q1. Hotel revenues and hotel occupancy rates were also flat during the quarter. Oman's recovery in tourism is vulnerable to weakening global travel demand and regional geopolitics. Tourism, alongside the broader transport and logistics sector, will remain a key target area of investment. Oman seeks to capitalise on growth plans in the region and is prioritising projects that enhance connectivity, such as the UAE-Oman link of Etihad Rail. In April, the two countries announced investment projects worth $35bn spanning various sectors including transport, renewable energy, and technology. Oman has also announced plans to build a fourth LNG train, which will boost its capacity by a third, supporting export and GDP growth.
Oman will become the first GCC country to levy a tax on personal income after its parliament approved the draft law. The bill builds on progress over the past few years to broaden the tax base. Both energy and non-energy receipts have been under pressure this year. That said, with spending rising by a modest 2% y/y in H1, our baseline shows the third consecutive budget surplus this year, albeit narrower than in both 2022 and 2023. Ongoing budget surpluses have facilitated a repayment of external debt. As a result, the public debt-to-GDP ratio fell to 36% last year, down from a peak of more than 65% in 2020. We expect it will decline near 33.5% this year. In late August, Moody's recognised Oman's ongoing efforts to strengthen public finances by raising the outlook on its Ba1 credit rating to positive, one step away from investment grade.
Our 2024 inflation forecast is at 0.8% and we expect inflation to rise to 1.9% next year. Headline inflation averaged 0.7% in Q2 before rising to 1.5% in July due to a less supportive base from last year. Food prices remain the main driver of upward pressure on headline inflation, with the cost of vegetables up 20.1% y/y in July and fruit and dairy prices also markedly higher. Oman continues to foster agricultural investment opportunities to boost food security.
