The Middle East faces a positive regional outlook underpinned by strong oil prices despite a darkening global landscape epitomised by mounting market pressures and heightened uncertainty, according to the latest Economic Insight report for the Middle East Q2, commissioned by ICAEW and compiled by Oxford Economics.

Middle Eastern countries are having to adjust to pressures stemming from the ongoing Russia-Ukraine conflict, China’s economic slowdown and the tightening of global market conditions, the report finds.

The rise in oil prices has provided strong support to the macroeconomic environment across the Gulf, offsetting the impact of rising inflation and supply chain disruptions to regional commodity importing countries. However, a scenario in which several large economies slide into recession would weigh on oil demand and test the resilience of the Gulf Cooperation Council (GCC).

Growth forecasts almost double following oil price increases

Inflated oil prices have led to improved GDP growth prospects in Saudi Arabia, where output is forecast to expand by 7.1%, compared to 4% previously. There is also optimism in the UAE, where government reform agendas and a rise in oil output are expected to underpin growth of 6.7% this year.

The higher income from hydrocarbons means that all six GCC nations will likely post budget surpluses despite rising expenditures. However, this is unlikely to impact on spending plans, with some countries earmarking their oil windfalls for debt repayment. This should see debt-to-GDP ratios decline across the region.

Vanessa Heywood, ICAEW Head of Middle East, said: “The Middle East is faced with an interesting dilemma. Geopolitical turmoil has brought the GCC nations to the international negotiating table to aid global oil supply challenges. But hiking up oil production counteracts the region’s long-term strategy of diversification. It is also important to note that the Middle East sits in an ecologically sensitive part of the world and is therefore more susceptible to climate change.

“While inflated energy prices will support its renewable energy transition, the region’s leadership has demonstrated resistance to delaying the progress being made in its energy transition, even as global pressures mount,” Haywood adds.

Non-oil growth also continues to show strong signs across the GCC; ICAEW’s 2022 forecast for GCC non-oil activity stands at 4%, rising from 3.4% three months ago. A recent S&P Global’s Purchasing Managers’ Index (PMI) survey in the UAE and Saudi Arabia indicated signs of business activity softening, as global headwinds take a toll on confidence, but they still remain firmly in expansion territory.

In Qatar, an upswing in demand pushed the PMI to a survey high in May. Despite this apparent resilience, many firms are bearing the brunt of rising costs to allay pressure on consumers, which is beginning to weigh on employment.

Global inflationary headwinds to consider

Rising commodity prices caused by the Russia-Ukraine conflict have buoyed the GCC’s fiscal and external balances but have subsequently caused inflation rates to increase. ICAEW predicts GCC inflation to average 3.1% this year (the forecast was 2.7% three months ago), up from 2.3% in 2021, before falling back to 2.5% in 2023.

“The GCC economy has seen an impressive bounce back from the disruption caused by the COVID-19 pandemic and has appeared steady despite global headwinds from prolonged market instability,” said Scott Livermore, ICAEW Economic Adviser, and Chief Economist and Managing Director, Oxford Economics Middle East.

“Growth in the oil sector has largely been the driver of the region’s success, although Saudi Arabia recently gestured its willingness to help control rising oil prices – an indication that the region is concerned about the impact of a recession in key economies,” he added.

The GCC’s US dollar currency pegs have meant the region’s monetary authorities have been forced to follow the United States Federal Reserve rate hikes in March and May. The Federal Reserve has displayed intent to tame the significantly high inflation in the US, with rate rise increases expected to total 2.5 percentage points this year.

The resulting rise in financing costs may dampen the non-oil recovery in 2023 but it should not pose an immediate risk to the region’s growth or continued expansion.

Related article: ICAEW: South-East Asia experiences uneven economic recovery