Q3 2025: The ICAEW Economic Update Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: On track for faster growth in 2026
- GCC: Oil gains and steady non-oil expansion support outlook
- Kuwait: Outlook improves after passage of new debt law
- Qatar: Strong 2026 outlook supports business optimism
GCC: Oil gains and steady non-oil expansion support outlook
- Middle East GDP will grow 3% in 2025, with GCC economy expanding by 4.1%.
- Low inflation and healthy labour markets will support strong growth by GCC consumers
- Oil price risks have fallen back despite lingering geopolitical tensions
We are cautious about global growth prospects for the remainder of the year and beyond given the backdrop of uncertainty leading to weaker investment growth. Although the loss of momentum at the global level has been only moderate so far, we think the adverse impact of tariff increases on activity will be more visible in H2, with our forecasts for world GDP growth at 2.7% for this year and 2.5% for 2026, both lower than the 2.8% expansion registered last year and the lowest since 2020. Economic performance across the Middle East has generally exceeded our expectations at the start of the year, with the region showing resilience to tariff headwinds and geopolitical tensions. We continue to expect Middle East output growth to be stronger this year and next than in 2024 and project regional GDP expansion of 3% this year and 3.7% in 2026, up from 1.8% last year.
We expect GDP growth in the GCC of 4.1% this year, nearly double the pace last year, and 4.6% in 2026, both modestly above consensus. Our projection for this year is 0.3ppt lower than three months ago, reflecting historical data revisions in Saudi Arabia following its rebasing of national accounts. Despite the downward revision, we continue to expect broad-based growth across the GCC region, with both the energy and non-energy sectors contributing positively.
The key theme driving our view is the markedly faster than expected rollback of oil production cuts by the OPEC+ group. OPEC+ members began to raise oil supply in April and have subsequently pledged to unwind nearly 2.5m b/d of supply cuts by end-October, well ahead of schedule set at the start of the year. This is resulting in stronger growth in regional energy sectors than what we had projected three months ago, especially in Saudi Arabia and the UAE, which retain the bulk of spare capacity.
Trade policy uncertainty has eased in recent months, and goods imported to the US from the GCC countries remain subject to a 10% tariff. Our assessment remains the GCC tariff vulnerability is minor, GCC countries trade relatively little with the US, energy exports and several other categories are exempt, and they can redirect their key export products to other markets. Indeed, this resilience is evident in recent trade statistics. In Saudi Arabia, non-oil exports rose by almost 16.5% y/y in H1, while in the UAE they rose by nearly 45% y/y during the same period. These figures underscore the UAE’s rising prominence as a global trade hub and reflect continued progress toward national diversification objectives.
Our updated baseline for the GCC now incorporates the OPEC+ supply boost, which we expect will drive oil-sector growth of 4.9% this year (up from 4.6% we forecast three months ago) and 6% in 2026. For Saudi Arabia specifically, we expect oil activities to grow by 3.5% this year in real terms, up from a 4.4% contraction in 2024, with growth rising to 6.7% in 2026. This is already showing in Saudi Arabia's production data of 9.8mn and 9.5mn barrels per day in June and July, up from 9.1mn in May. We expect oil production to return to 11mn bpd by late 2027. For the UAE, higher production levels drive our 6.3% oil GDP forecast.
Growth is also being supported by continued non-oil momentum, powered by healthy labour markets and high levels of confidence, and we expect a 4% growth in the region's non-oil output this year. This is particularly true in Saudi Arabia, where we see non-energy growth expanding around 5% annually for the next few years, and the UAE, where it will average around 4.5%. Final GDP figures from Saudi Arabia for Q2 confirmed the economy grew by 3.9% y/y in Q2, up from 3.4% in Q1, driven by 4.6% y/y growth in non-oil activities, which offset slower expansion in government activities. The UAE’s economy expanded by 3.9% in Q1, with non-oil GDP growing by 5.3%, bringing its share in overall GDP to 77.3%.
Recent PMIs show sustained expansion in the GCC non-energy private sectors despite the oil price and trade headwinds. The August surveys showed improved business conditions relative to July, with domestic demand providing a key support. We believe the picture for consumers remains bright for coming year, with spending set to be underpinned by robust employment trends and low inflation. We project real household consumption across the GCC to rise 3.4% annually over the next five years, compared to 1.7% in advanced economies, according to our recent research study.
Meanwhile, relaxed lending rules are fuelling a structural uptrend in credit growth especially where non-nationals have been given access to borrow and purchase property. In Saudi Arabia, private-sector credit continues its double-digit expansion. We expect this positive trend to continue as momentum builds, particularly as the government focuses on expanding the financial services sector through its Vision 2030 objectives.
Tourism plays a vital role in regional diversification plans and has been a key driver of non-energy growth despite heightened geopolitical tensions in the broader Middle East region. The number of tourists visiting the region has remained on an uptrend, including in Dubai, which was visited by nearly 10m people in H1, up 6% y/y, underscoring the success of its D33 agenda to establish the Emirate as a premier global tourism destination. The sector’s performance not only contributes to fiscal revenues but also enhances the UAE’s resilience amid oil price volatility and geopolitical risks, supporting macroeconomic stability and budget flexibility.
The weak outlook for oil prices will limit budget revenue gains despite rising oil production. Saudi Arabia's fiscal deficit narrowed to SAR34.5bn in Q2 from SAR58.7bn in Q1, primarily owing to strong growth in non-oil government revenue. Alongside this, government expenditure slowed, falling 8.9% y/y. Current and capital expenditure were both soft in Q2, with a contraction in government wages and salaries being the main driver behind the current expenditure weakness. Despite fiscal consolidation in Q2, we expect a budget deficit of 3.6% of GDP in 2025, 1.3ppts higher than the figure the Ministry of Finance laid out in its budget statement. We think the government will raise spending next year, leading to a wider deficit and higher borrowing. Elsewhere in the region, we project deficits in Bahrain, Kuwait and Oman and surpluses in Qatar and the UAE.
Low debt levels have allowed regional countries to maintain favourable credit ratings and access capital markets at ease. With the exception of Saudi Arabia, fundraising has slowed year to date to reflect uncertainties associated with the global trade and geopolitical developments, but anecdotal evidence suggests investors are slowly regaining confidence, which will likely lead to a pick-up in activity in the remainder of the year, especially in the UAE. This should help Dubai equities maintain their impressive performance and reignite the Abu Dhabi market
Our aggregate GCC inflation projection for 2025 is broadly unchanged at 2.1%, with a moderate rise to 2.6% next year. Food price pressures re contributing more to recent inflation readings, except in Bahrain, while housing costs remain the main driver of inflation in the UAE and Saudi Arabia. In Saudi Arabia, rental inflation, which makes up over one-fifth of the CPI basket, is the highest in the region at 5.6%, though this marks the slowest pace of increase since late 2022.
The region's central banks follow US monetary policy, which implies some easing in domestic interest rates ahead. Softening labor market conditions in the US mean we now think the US Federal Reserve will resume rate cuts this month, rather than in December, as we anticipated previously. We pencil in a cumulative 125bps of easing by end-2026, which should support regional consumption and investment next year.
The outlook for the broader Middle East seems slightly more positive than three months ago, with the regional conflicts calming somewhat, though geopolitical uncertainty persists. Iran faces a potential reinstatement of EU sanctions, which would reinforce the adverse impact of US measures We think the economy will continue to be affected by persistent inflation, and domestic challenges, with our 2025 GDP growth forecast lowered by 0.9ppts, to 0.7%. In Lebanon, we’ve raised our GDP growth forecasts by 0.4ppts to 1.8% for 2025 and by 0.7ppts to 4.3% for 2026. The formation of a government earlier this year renewed the impetus for reform, leading to the recent passage of a bank restructuring law. We think external funding, including from the IMF, is conditional on finalising other key legislation, such as depositor compensation and the 2026 budget bill. In Syria, we now see growth of 1.3% this year and 3.4% in 2026, following the easing of sanctions and introduction of early reforms under new President Ahmed al-Sharaa. We think growth this year will be consumer-led, with our consumer spending growth forecast revised up to nearly 8% y/y, supported by the return more than 500,000 Syrians. For Iraq, we forecast 2025 GDP growth of 0.3%, rising to 2.8% in 2026. Although Iraq is bound by a 35% US tariff rate as of August, we see minor impact of this on the economy, with our assessment indicating the effective US tariff rate on Iraq remains near 0% due to oil exemptions.
Kuwait: Outlook improves after passage of new debt law
- Economy will continue to recover from last year’s contraction.
- Oil sector growth will lead expansion in the near-term.
- Recent legislation frees up government space to support the economy
We expect overall GDP growth in Kuwait to rise to 4% this year, following a 2.6% contraction in 2024. Our optimism is driven by the easing of oil production cuts and robust credit expansion. We expect no noticeable impact of the 10% US tariff on Kuwait’s domestic economy. Only 2% of Kuwait’s exports are destined for the US and energy shipments are exempt.
We expect Kuwait's oil sector, which accounts for about 50% of GDP, to be the main driver of overall growth in the near-term, with expansion of 7% this year. We expect Kuwait will raise its oil production to 2.6m b/d by the end of September, from an average of 2.4m b/d last year. This is consistent with recent OPEC+ decisions, which frame the group’s unwinding schedule, including adjustments for previous overproduction by some countries, Kuwait included. In the medium term, Kuwait aims to increase its oil production capacity to 4m b/d by 2035. This is in addition to Kuwait's three new oil discoveries in Al-Nokhatha, Al-Jlaiaa, and the Partitioned Neutral Zone, with their combined reserves estimated at 5.65bn barrels of oil equivalent.
The trends in the non-oil sectors are also supportive of overall economic growth, despite recent easing in momentum. Weakening local and global demand conditions are weighing on business confidence and Kuwait’s headline PMI moderated to 53 in August, from 53.5 in July. Uncertainty over the outlook has prompted greater caution with respect to hiring. However, activity continues to benefit from an upturn in lending. Credit growth rose to 7.5% y/y in July, the fastest pace in two and a half years, driven mainly by financial and trade activities.
Earlier this year, Kuwait eased restrictions on foreign entities' housing ownership. Kuwait's housing market rebounded strongly last year, with the value of transactions in investment and commercial properties surging by 36.8% y/y and 46.6% y/y, respectively. Given the relaxed ownership restrictions and the pending approval of mortgage laws, we expect the housing and construction sector to be a key driver of non-oil activity. We expect the non-oil sector to grow by 1.3% this year and average 3% annual growth over the medium term.
According to recent reports, Kuwait’s fiscal deficit improved markedly in the fiscal year ending March, thanks to expenditure restraint. The gap narrowed to KWD1.05bn, equivalent to only 2.2% of GDP, down from a deficit of KWD1.56bn or 3.1% of GDP in the previous fiscal year and substantially below the budgeted deficit of KWD5.6bn or 11.1% of GDP. The passage of a debt decree in March after eight years of gridlock means the government will be able to support a larger deficit going forward, reducing the need for spending cuts. The new law sets the long-term debt ceiling at KD 30 billion ($97 billion), with banks preparing issuance worth KWD2bn ($6.6bn) in the current fiscal year to bridge the funding gap. We project budget shortfalls of 7.7% of GDP this year and 7.2% of GDP in 2026, which set against strong accumulated sovereign wealth assets will allow Kuwait to maintain current credit ratings.
Inflation remains relatively stable, with our 2025 forecast at 2.4%. Intensifying global food inflation pressure may emerge during the remainder of this year, making Kuwait's inflation stickier. The Central Bank of Kuwait hiked much less aggressively than the Fed and its GCC peers during the tightening cycle and we think it will likely implement more gradual easing once the US Fed resumes rate cuts.
Qatar: Strong 2026 outlook supports business optimism
- GDP growth is seen nearly doubling to 4.8% in 2026
- LNG production surge will boost the government's ability to support the economy
- Overseas investments will complement the domestic diversification drive
We project Qatar’s GDP growth at 2.7% for this year and 4.8% for 2026. This comes on the back of a strong start to the year, with Q1 GDP data showing growth of 3.7% y/y. The non-energy sector's GDP registered growth of 5.3%, while the energy sector grew by 1%. Businesses remain optimistic about the outlook despite uncertainty over demand and recent PMI prints have held above the H1 average of 51.1, owing to ongoing labour market strength. We continue to project an expansion of 3.6% in the non-energy economy this year and expect a similar pace of growth in 2026. The outlook continues to benefit from improvements in the regulatory framework and business environment, which have helped elevate the country's competitiveness ranking by two places to ninth globally in the latest IMD competitiveness index.
Tourism has provided significant support to non-energy growth and will remain a key driver of future activity and employment. Qatar welcomed 5.1mn overnight arrivals in 2024, a 25% increase on 2023 and 138% higher than 2019 levels and recent reports point to a 3% y/y rise in the number of foreign arrivals in H1. The launch of the pan-GCC visa and expanded flight schedule from Doha to key destinations will likely help extend the positive performance, and we forecast arrivals to increase to 5.3mn this year. In the longer term, Qatar's bid to host the 2036 Olympics signals its firm commitment to tourism development.
Qatar-led groups are targeting growth in strategic markets, with major investment pledges announced in August, including $103bn of deals across Africa spanning a broad range of sectors and a $4bn investment to develop Syria's Damascus airport. Qatar is also setting out to develop a major tourism project in the Alam El Roum area on Egypt's northern coast for $4bn, joining other GCC countries in growing its long-term investments in Egypt. The pledge forms part of a broader $7.5bn package announced earlier this year.
Industrial output data for Q2 showed 2.4% y/y growth, spurred by stronger mining production, although this comes off a low base from last year. The July report from the Gas Exporting Countries Forum shows liquified natural gas (LNG) production trends are supportive of exports and we think activity will improve in the remainder of the year, before surging in 2026 as planned projects are completed.
Qatar targets liquefied natural gas (LNG) capacity target of 142mn tonnes per annum (mtpa) by end-2030. This is up nearly 85% from the current 77mtpa, and up 13% on the intermediate target of 126mtpa by 2027. The first production boost will come from the North Field East project by mid-2026, followed by the North Field South phase of the expansion. The North Field West phase is in its early stages, with construction likely to begin in 2027.
The expansion of the North Field gas project means the energy sector will play a more prominent role in the next five years, boosting the government's ability to support the economy. We expect Qatar to run a budget surplus of QAR14.1bn (1.7% of GDP) this year and see the surplus more than tripling in 2026, thanks to the LNG production boost. This is despite a cumulative deficit of QAR1.3bn in H1, reflecting a rise in public spending against the backdrop of hydrocarbon revenue headwinds.
We forecast Qatar’s inflation to average 0.4% this year but see it rising above 2% in 2026. Qatar has the second-lowest rate of inflation in the GCC region, behind that of Bahrain. Food and communication are the key drivers of Qatar’s inflation. Meanwhile, prices are lower than last year across most of the CPI basket, though the drag from the housing and utilities category is easing, albeit remaining substantial. We expect the impact of these disinflationary forces to gradually fade over time.
We now see the US Federal Reserve resuming interest rate cuts in September, rather than December, and pencil in a cumulative reduction of 125bps by end-2026, with Qatar's central bank following suit, which will support credit expansion and spending.