Economic Update: Near-term outlook little changed after Trump’s win

• GCC: Growth will move into higher gear in 2025
• Saudi Arabia: Transformation continues with strong non-energy growth
• UAE: Set for another year of robust economic expansion

GCC: Growth will move into higher gear in 2025

• Middle East GDP growth will nearly double in 2025
• Regional economies are not at risk of direct Trump tariffs
• Geopolitical developments remain the biggest headwind to the outlook

The shift in our US and global forecasts following Donald Trump's presidential victory generates no noticeable impact on the near-term outlook for the Middle East. We think it will take time for Trump’s policies to be implemented and forecast global GDP growth at 2.7% this year and 2.8% in 2025. That said, our projection for Middle East GDP is slightly lower than three months ago. This is due to the recent extension by OPEC+ of caps on oil production and our view that they will likely be extended even further. We now expect Middle East GDP will grow 1.8% this year (0.2pp down on three months ago) and 3.5% in 2025 (0.3pp less than previously).

We think no regional economy is at risk of targeted US tariffs but a blanket US tariff on all trading partners remains a risk, while the negative spillovers from targeted tariffs on China and other economies including the EU may become evident in the medium term. In the short term, we hold a pessimistic outlook on the resolution of the regional conflict.

The direct impact of Trump’s policies on GCC growth is likely to be limited in the near term, but we are slightly more cautious on our GCC growth projections. OPEC+ member states have recently agreed to extend oil output limits into 2025 and we think further delays are likely. We have therefore cut our GCC growth forecast for this year by 0.2pp to 1.9%, with growth set to rise to 4% in 2025 as oil output cuts are unwound. We see a broadly steady performance of the non-energy sectors, with expansion of 4% this year and next. We expect Trump’s policies will take time to feed through, with the impact on growth performance occurring mostly in 2026-27.

Oil prices have been volatile in recent months, buffeted by geopolitical tensions in the region on one hand and concerns over demand on the other. The OPEC+ group has delayed a planned supply increase until January (from December previously) in the face of weak demand, reinforcing the group's commitment to supporting oil prices. In our opinion, the soft demand outlook means any surge in the Brent oil price above $75 will likely be transitory. Meanwhile, President Trump’s stated support for the domestic energy sector may limit the pace of unwinding of the OPEC+ supply cuts, although he will likely be tougher on Iran, potentially removing some of its crude exports off the market. We now expect OPEC+ to keep output steady until Q2 2025, and we forecast oil prices to average $72.6 per barrel in 2025 (down from $77.5 we forecast three months ago) and $71.5 in 2026.

The extension of oil output cuts by the OPEC+ group prolongs the drag from the energy sectors on GCC growth, but we think oil activities will rebound strongly in 2025, with growth of 4.2%. For Saudi Arabia specifically, we see oil-GDP growing by 2.7% next year, following two years of deep decline. We expect the GCC energy sectors to drive regional growth in 2025-26 as countries gradually increase production.

Regional PMIs remain firmly in expansionary territory, supporting our positive outlook for GCC non-energy sectors, which look on track for a 4% expansion this year and next. Strong growth prospects will maintain the region’s attractiveness to investors, with the UAE holding on to the top position globally in terms of FDI flows to the size of the economy. That said, the imposition of US trade tariffs will lead to a more fragmented world, making it harder for GCC countries to achieve growth and diversification objectives even though the region is unlikely to be directly targeted. Indeed, Saudi Arabia has struggled to meet export diversification targets, such as the 50% share of non-oil exports in non-oil GDP embedded in its Vision 2030, with only limited improvement to date.

Our overall fiscal outlook is little changed compared to three months ago. Fiscal revenue performance has been impaired by ongoing oil production cuts and lower oil prices but should stabilise in 2025. Meanwhile, government spending will likely rise only modestly next year. Overall, this will result in the aggregate GCC budget position remaining in a small surplus thanks to ongoing surpluses in Qatar and the UA. By contrast, Saudi Arabia will run budget deficits for the rest of the decade. That said, its low government debt ensures borrowing flexibility through both the international and local debt markets, while its sovereign wealth fund, the Public Investment Fund, is set to remain a strategic spender.

We have raised the aggregate GCC inflation projection slightly to 1.8% this year (1.7% before) and 2.3% in 2025 (up 0.2pp on three months ago). Recent readings show inflation is below 1% in Bahrain, Oman and Qatar, while it slowed to a four-year low of 2.4% in Kuwait. However, in Saudi Arabia, inflation spiked to a year high of 1.9% in October, driven almost exclusively by upward pressure from housing rents. High demand for housing will likely sustain double-digit annual increases in costs in the foreseeable future.

GCC central banks will follow the rate path of the US Federal Reserve given the exchange rate pegs against the US$. Following 75bps in cumulative rate cuts in September and November, our baseline forecast assumes a 25bp rate cut in December, but we have scaled back our expectations for Fed easing next year and now forecast a total of 75bps (down from 100bps). There is a risk that the Fed could deliver even fewer rate cuts than what we assume in our updated baseline.

Geopolitical risks remain a major headwind to the outlook for the rest of the Middle East. In Iran, the near-term growth outlook remains grim as we rule out any sanctions’ relief under the Trump government. We forecast GDP growth of 3% this year and 2.5% in 2025. In Lebanon, we’ve cut our 2025 GDP growth forecast by 2.2pp to 0.8% to reflect the escalation in conflict between Israel and Hezbollah. Despite talks of ceasefire and Israel's moderate retaliation against Iran, which has calmed fears of a full-scale regional war, we expect the conflict will continue into next year and delay economic recovery. As we anticipated, the domestic political situation hasn't progressed. Consequently, Lebanon is in its third year without a president or a government. For Jordan, the external environment is also weighing on the outlook and will limit the rise in GDP growth to 2.1% in 2025, from an estimated 1.6% this year. In Iraq, we've lowered our forecast for 2025 to 2.8% from 3.6%, due to the expected extension of the oil output cuts. Expansionary fiscal policy continues to support Iraq’s non-oil economic activity.

Saudi Arabia: Transformation continues with strong non-energy growth

• Economy seen growing by 1.4% this year before growth rises to 4.4% in 2025
• Activity will continue to be supported by strong investment, while consumption remains robust
• Government budget will be in deficit this year and for the foreseeable future

We forecast Saudi Arabia's GDP will expand by 1.4% in 2024, driven by 4.5% growth in the non-energy sector. We forecast a rebound in output growth to 4.4% in 2025, as the government continues to pursue its growth agenda, sustaining strong non-energy sector momentum, and oil production cuts are gradually unwound. Oil production averaged 9m b/d in recent months, but we forecast a 3.4% rise in output in 2025.

Preliminary Q3 estimates showed Saudi GDP expanded by 2.8% y/y, following four quarters of decline. Diversification efforts are bolstering non-oil sector performance, which we see as a key driver for growth against a backdrop of extended oil production cuts. Activity will continue to be supported by strong investment in tourism, construction and public projects, and high-frequency indicators signal robust domestic demand. The latest PMI rose to a six-month high of 56.9 and overall output continues to show signs of growth for this year. Point-of-sales transaction values rose by a strong 8.4% y/y in Q3 and were mostly broad-based except in sectors like public utilities, construction, and electronics, which recorded declines. We expect consumption to remain strong, backed by lower rates and contained inflation.

The tourism industry will remain a significant contributor to growth and diversification efforts, with planned investment of $800bn over the next 10 years. The outlook is shaped by the National Tourism Strategy and a strong pipeline of flagship events, including the Asian Cup 2027, the Asian Winter Games 2029, Expo 2030, and the FIFA World Cup 2034. In the near term, the soon-to-be-launched GCC-wide visa will positively impact inbound tourism, as will an expanded visa offering, including the 'Visiting Investor' visa.

The strong momentum in Initial Public Offerings continues in Saudi Arabia as authorities seek to deepen capital markets and take advantage of the region being one of the brightest spots in the global economy. Saudi issuers raised $2.6bn in the first nine months of the year, slightly ahead of the $2.4bn raised in the UAE. We expect further listings on the Saudi market amid strong demand, supporting growth and diversification ambitions. Meanwhile, the recent secondary offering of shares in the oil company Aramco raised a total of $12.35bn, with as much as 60% of shares believed to have been allocated to foreign investors.

Lower oil revenue has negatively affected the public finances; Saudi Arabia recorded a budget deficit of SAR30.2bn in Q3, extending the period in the red to two years. Year-to-date, the deficit stands at SAR58bn, smaller that the Finance Ministry's updated estimate for this year of SAR118bn (2.8% of GDP), which matches our projection for this year. We expect similar shortfalls in 2025-26, but Saudi Arabia's relatively low government debt ensures borrowing flexibility.

Despite pressure on the budget, the wave of credit rating upgrades continues. S&P has revised Saudi Arabia's outlook to positive while affirming the A rating, signalling confidence in the Kingdom's long-term economic prospects as reforms bolster non-oil GDP growth. We think the transformation under Vision 2030 will continue even if some projects are scaled back or cancelled. The authorities now offer a 30-year tax relief to global firms establishing regional headquarters in the Kingdom, which should help boost FDI in the near to medium term and complement the domestic investment drive.

Optimism about the outlook and strong population growth means rents have continued to surge, especially in Riyadh, putting upward pressure on inflation, which has recently risen to this year’s high of 1.9%. But with costs across the rest of the CPI basket moderating, we continue to expect inflation to average 1.7% this year and 2.3% in 2025. The Saudi Central Bank followed the US Federal Reserve by easing policy rates by a cumulative 75bps. In our updated baseline forecast for interest rates, we anticipate another rate cut by year-end and three rate cuts next year, providing further support to lending and the economy.

UAE: Set for another year of robust economic expansion

• Economy set to grow by 3.7% this year and pick up to 4.5% in 2025
• Higher oil production volumes will support growth next year
• Largest-ever budget aligns with the UAE’s development goals

Our 2024 GDP growth forecast for the UAE stands at 3.7%, weighed down by oil production cuts. We still expect output to be gradually hiked, helping GDP growth to pick up to 4.5% next year. We project 4.5% growth in the non-energy economy this year but see a slightly more cautious recovery of 4.3% in 2025 as pricing pressures and capacity constraints dampen growth in key sectors such as finance and construction.

Oil production has hovered slightly under 3m bpd, consistent with the OPEC+ production target. We expect oil output levels will ramp up significantly throughout 2025-2028, fuelling overall growth.

GDP data for Q2 showed output expanded by 4.1% in Abu Dhabi and 3.3% y/y in Dubai. The latest PMI surveys suggest non-energy sector growth has eased somewhat compared to H1, but momentum remains supported by three key drivers: a competitive tourism and travel sector, a supportive real estate sector, and deepening capital market growth. Tourism remains a vital growth engine for the UAE economy with visitor arrivals in Dubai up 6.3% y/y in the first nine months of this year, while Dubai property transactions reached a record high in September. Meanwhile, local bourses continue to benefit from the flow of IPOs.

The UAE is also advancing progress across sectors key to its Industrial Development Strategy, including renewables, manufacturing, advanced technology, healthcare and food security, with key entities, such as the Abu Dhabi National Oil Company (ADNOC) and the Emirates Development Bank (EDB) providing funding. Meanwhile, the Ministry of Industry and Advanced Technology launched a new digital platform to enhance interactions between investors and businesses and attract further investment. The UAE recorded US$16bn in greenfield foreign direct investments last year, cementing the nation's ranking as a top FDI attraction spot. Key sectors leading the inflow of investment were financial services, real estate and manufacturing.

The UAE is actively pursuing bilateral agreements by expanding its Comprehensive Economic Partnership Agreements, with recent deals including Australia, Jordan and Vietnam. We consider trade a critical growth driver with the potential to enhance investment and private-sector collaboration. In October, Sheikh Mohamed bin Zayed al Nahyan attended the BRICS summit, marking the UAE’s inaugural participation as a full member.

The UAE is also leading regional efforts in developing renewable energy capacity. In the run-up to the COP29 summit, the UAE unveiled an improved climate plan, pledging to cut carbon emissions by 47% from 2019 levels by 2035. The goal marks a significant improvement on the target unveiled in July 2023, which showed a 19% reduction in carbon emissions from 2019 levels by 2030. While the new target has faced criticism for excluding exported emissions and including offsets, it represents a substantial step forward and we expected the UAE to build on past efforts. The UAE’s renewable energy capacity surged by 70% last year and is now 10 times larger than it was 5 years ago, accounting for 14% of the country's total electricity capacity.

The policy mix is turning more supportive for growth. The UAE cabinet approved its largest-ever budget for 2025, with a record expenditure of $19.5bn balanced by matching revenues. This budget reflects the UAE's development goals, which prioritise social development in support of non-oil sector growth, thereby promoting a sustainable economic trajectory. We project a budget surplus of 4.1% of GDP in 2025.

Meanwhile, interest rates have begun to come down. The Federal Reserve lowered the federal funds rate by a cumulative 75bps so far, with the UAE central bank following suit. We forecast easing to continue in the coming months, which will provide support to real estate and private-sector investment.