Q1 2025: The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: Outlook holds up in the face of trade uncertainty
- GCC: Regional growth will withstand tariff headwinds
- Qatar: GDP growth will gain pace despite external headwinds
- Bahrain: The non-oil economy will continue to lead growth
GCC: Regional growth will withstand tariff headwinds
- GCC will stage a strong recovery this year despite trade headwinds
- The non-energy economy is on track for 4.4% expansion
- The impact of geopolitics on growth will remain limited
The environment of rising protectionism and persistent geopolitical tensions is clouding the outlook for the global economy, with our 2025 world GDP growth forecast cut by 0.2ppts, to 2.6% relative to three months ago. The Middle East is out of President Trump’s direct tariff firing line and we continue to forecast a strengthening in regional growth this year. That said, Trump’s tariff policies have created uncertainty over external demand, dragging our projection for Middle East 2025 GDP growth slightly lower compared to three months ago. We now expect Middle East GDP will grow 3.3% in 2025 (0.2pp less than previously).
We expect GDP growth in the GCC to rise to 4% this year, broadly in line with the consensus and up from an estimated 1.8% in 2024. OPEC+ members have confirmed they would abide by their plan to boost oil supply from April, limiting risk of further delays. Meanwhile, we see strong activity across the non-energy sectors, with expansion of 4.4% this year, up from our estimate of 3.9% in 2024. Regional PMI data were all firmly in expansionary territory in February. The growth of new business and output dipped slightly in Kuwait and Saudi Arabia, but was still at elevated levels, while sentiment has held up across the region in the face of trade uncertainty. This is in line with our view that the GCC is not at risk of targeted US tariffs and that the US remains a key trade partner for the region. Indeed, Saudi Arabia’s $600bn multi-year investment pledge in the US underscores its commitment to strengthen economic ties.
Following the recent announcement, the OPEC+ group will gradually bring more oil supply to market from April. We expect these gradual output hikes will generate oil-sector growth of 3.2% this year, following two years of contraction. For Saudi Arabia specifically, we now project average oil production of 9.3mn bpd for the year, up from our previous estimate of 9.1 mn bpd. This revision raises our oil sector growth forecast to 1.9% in 2025, compared to the earlier estimate of 1%. The UAE will benefit from a higher production quota of 3.5 mn bpd, supporting oil sector growth of 4.8%. We think growth in the GCC oil sectors will pick up more strongly in 2026 as countries continue to raise supply.
The outlook for the non-oil sectors is for another year of strong expansion and we expect demand conditions in the region to remain supportive of activity. We see growth in Saudi Arabia and the UAE outperforming again, with expansion of 5.8% and 4.8%, respectively, thanks to a strong pipeline of infrastructure projects and private-sector development. We remain confident the tourism industry – the fastest-growing sector across the region in 2024 – will remain a vital engine for growth and diversification efforts. Saudi Arabia is among the countries that welcomed a record-high number of international tourists in 2024, with growth seen this year and beyond, supported by an expanded visa offering, including the GCC-wide visa. Trade will also continue to be a key growth driver, especially in the UAE, which has recently broadened market access and fostered collaboration through several more comprehensive economic partnership agreements. The UAE’s foreign trade reached a milestone in 2024, surpassing 3trn dirhams for the first time. Meanwhile, the enforcement of a 15% corporate tax rate on large multinationals in Oman, Qatar and the UAE aims to increase their compliance with global tax standards, while also supporting the revenue outlook.
Regional budgets this year continue to balance fiscal discipline and sustainable economic trajectory, with a strong focus on social development, including education and healthcare. Given our oil price and production forecasts, and expectations of a modest rise in government spending, we anticipate the aggregate GCC budget position will be broadly balanced, thanks to surpluses in Qatar and the UAE. Meanwhile, we expect Saudi Arabia to a budget deficit of 3% of GDP as the government pursues strategic investments. The Saudi authorities are looking to borrow SAR139bn ($37bn) this year to finance the fiscal deficit and debt maturities as per its annual borrowing plan. Robust demand for bonds issued by regional sovereigns year-to-date is a testament to their strong creditworthiness.
Our aggregate GCC inflation projection for 2025 remains at 2.3% and we see inflation stabilising around 2% in the medium-term. Recent readings show inflation is below 1% in Bahrain, Oman and Qatar, while in Saudi Arabia, the region’s largest economy, inflation averaged 1.7% in 2024, driven almost exclusively by upward pressure from housing rents. Housing prices are also pushing inflation up in Dubai, where inflation readings have hovered around 3%, but this is offset but much lower readings in other emirates. At 2.9%, Kuwait had the highest inflation rate in the region in 2024.
Policy easing by GCC central banks will now be slower against the backdrop of US$-pegged currencies. The US Federal Reserve delivered a cumulative 100bps of cuts in 2024 before pausing in January and we now think it will hold policy steady until December, when we expect a 25bps rate cut. This is down from our previous forecast of three rate cuts this year. Consequently, the recent pick-up in lending growth may lose momentum in the near-term, albeit remaining supportive for non-energy sector growth.
Elsewhere in the Middle East, the outlook is mixed amid lingering geopolitical tensions, and we continue to think the regional conflict will remain unresolved despite multilateral efforts to secure a lasting ceasefire. In Iran, we have cut our 2025 GDP growth forecast by 0.2pps, to 2.3% to reflect a weaker outlook for domestic demand. The return of President Trump’s "maximum pressure" campaign poses a further downside risk to our projections given the headwinds to Iran's oil exports from a stricter sanction regime. In Lebanon, we’ve become more optimistic about a recovery this year and see upside risks to our 0.8% GDP growth forecast. The formation of a new government after two years under a caretaker cabinet marks a key step toward economic reform and a revival of the economy, while also serving as a pre-requisite for re-engagement with the IMF. For Jordan, we raised our 2025 projection to 2.9% late last year owing to strong performance of the manufacturing sector but the suspension of USAID and Trump’s threats to withdraw U.S. foreign aid mean risks to this projection are now skewed to the downside. In Iraq, we've kept our forecast for 2025 at 2.8% amid ongoing curbs on to oil output. The resumption of oil shipments through the Iraq-Turkey pipeline suggests some upside risks, while expansionary fiscal policy continues to support non-oil economic activity.
Qatar: GDP growth will gain pace despite external headwinds
- GDP growth will rise to 2.1% before more than doubling in 2026-27
- The authorities are taking further steps to attract investment and broaden diversification
- Budget surplus will widen this year and beyond
We forecast Qatar’s GDP will expand by 2.1% this year and expect growth will more than double in 2026 as the additional LNG capacity starts up. We project the non-energy economy will grow by 2.9% this year, remaining the primary growth engine and mitigating weakness in industry.
We estimate the economy grew by 1.9% last year. Recently reported GDP data for Q3 revealed output grew by 2.0% y/y, lifting the expansion in the first three quarters of last year to 1.4%. Overall, the non-energy sectors continued to drive growth, boosting the expansion in the first three quarters to 2.9% y/y, while the continued decline in energy sector output resulted in a contraction to 1.1% over the same period.
The near-term outlook for the energy sector remains weak and we think it will grow by just 0.6% this year. This will still be an improvement on last year – weak industrial production data for Q4 confirm energy output likely contracted overall. The oil output has been relatively flat in recent years at around 600,000 barrels per day. However, the North Field gas expansion project will have a positive medium-term impact as the liquefied natural gas capacity is raised to 126mtpa in 2027, from 77mtpa currently.
Tourism has provided significant support to non-energy growth and will remain a driver of future activity and employment. Data show the number of foreign arrivals neared 4.5mn last year up to November amid sustained double-digit annual growth. We estimate overnight arrivals reached 5mn by end-2024, a 23% increase on 2023 and 134% higher than 2019 levels. The launch of the pan-GCC visa will likely help extend the positive performance this year, lifting the number of arrivals to 5.3mn.
The authorities continue to take steps to attract investment and broaden diversification. In the last month, the government unveiled a 50% discount on business rates in industrial, logistics and commercial zones, slashed start-up fees within the Qatar Financial Centre, and launched a Digital Skills Framework, all aligned with the National Development Strategy. The planned revamp of key laws governing bankruptcy and public-private partnerships will likely help unlock stronger foreign direct investment inflows in support of non-energy expansion.
The goods trade surplus remained wide in 2024, although it narrowed to US$59.2bn from US$66.3bn a year earlier, reflecting slightly weaker exports and stronger imports. We expect the surplus to widen modestly this year, which underpins the broader external surplus projection for 2025 of US$34bn (14.9% of GDP).
Our forecast for the fiscal surplus this year is for a surplus of QAR27.3bn (3.3% of GDP). This is a significantly better outcome than the deficit of QAR13.2bn pencilled into this year's budget. Given this projected gap and a nearing maturity, Qatar returned to debt markets this month, raising US$3bn in a double-tranche, oversubscribed transaction. The bonds will not be included in the universally tracked emerging market bond index, following a recent reclassification to a developed market from an emerging markets status.
Our 2025 average inflation forecast remains at 1.6%, up from 1.1% last year. Survey data suggest inflation was mild in January, as firms absorb rising input costs rather than pass them on to consumers as they prioritise increasing sales volume. Policy easing by the Qatar Central Bank will now be slower, as we think the US Federal Reserve will hold policy steady until December, when we expect a 25bps rate cut. This is down from our previous forecast of three rate cuts this year.
Bahrain: The non-oil economy will continue to lead growth
- GDP growth will double to 2.8% this year
- Oil sector set to rebound and contribute positively to growth this year
- Persistent budget deficits and a rising debt burden pose a downside risk to growth
We expect Bahrain’s GDP growth to pick up to 2.8% this year, with 3.1% growth in the non-oil economy. Bahrain’s workforce is set to expand, with rising migration trends and updated UN population projections positioning the country to leverage its growing labour force. This expansion will be key to enhancing productivity and advancing diversification efforts across core sectors.
We estimate the economy expanded by 1.4% in 2024, continuing to slow down from a multi-year high in 2022. Non-oil GDP growth reached around 2% last year and contributed 86% to overall GDP, showcasing the success of Bahrain's diversification efforts.
Non-oil growth prospects are positive, with sectors like accommodation and food services, financial activities, and insurance showing strength. Bahrain hosted the Gateway Gulf event under the theme 'Investing in a Rapidly Transforming Region' in November last year. The event concluded with $12bn in deals across finance, manufacturing, real estate, and tourism, highlighting Bahrain’s diversification progress. As part of its tourism strategy, a $427mn waterfront project is underway, alongside a $221mn exhibition centre, which is set to become the region’s largest.
To attract foreign investment, Bahrain is establishing new industrial free zones targeting the foodstuffs, pharmaceuticals, and garments industries. These zones will be located in Muharraq, near Bahrain International Airport, and are set to support job creation. Initiatives such as the Golden License introduced in 2023 have provided a key support to FDI inflows into key sectors like financial services, manufacturing, and technology. As Bahrain’s economy continues to diversify, financial services have overtaken oil as the largest GDP contributor.
Oil GDP continued to contract last year, showing a 2.4% decline, partly due to reduced production at the Abu Safah oil field. We think Bahrain's energy sector will contribute to growth this year and we forecast oil growth of 0.9%. Bahrain’s Vision 2030 is driving the $6bn Bapco Modernisation Programme, which will expand refining capacity from 267,000bpd to 400,000bpd by 2025. The upgrade in production capacity will support growth in the energy sector, its fiscal impact may be constrained by lower oil prices, which remain well below Bahrain’s breakeven level of $135.70 per barrel. Bapco Energies' successfully closed $500mn funding for the Bahrain Field Expansion and Development Programme in August last year.
Inflation has remained low, averaging 0.9% in 2024, with prices of food and restaurant hotels being the key driver of upward pressure. Food. We think prices will rise to 2.8% this year, which may hinder consumer spending, before stabilising around 2% in the medium-term.
We expect the fiscal balance will stay in deficit in 2025 and beyond, keeping the debt load well above 100% of GDP. Key initiatives, including the introduction of a 15% domestic top-up tax for MNEs and a multi-year fiscal consolidation plan, aim to enhance economic sustainability. But the fiscal burden remains severe, reflected in a negative assessment from a credit agency Fitch in February, with debt repayments continuing to take a sizeable share of the budget.
