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Q4 2023: The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.

Economic Update: Region will defy global slowdown in 2024

  • GCC: Non-energy sectors will continue to drive GDP expansion
  • Saudi Arabia: Oil output cuts hamper outlook for the economy
  • UAE: Government policy prioritises non-energy sector development

GCC: Non-energy sectors drive GDP expansion

  • We have downgraded our Middle East forecast by 0.4pp, to 1.3%.
  • Non-energy sectors support growth in GCC countries despite decline in oil output.
  • We project a prolonged period of high rates despite stable inflation.

The global economic backdrop is weakening as we move into 2024, with most major economies set to experience a sharp slowdown after greater-than-expected resilience this year. By contrast, the Middle East will expand less than we initially thought this year, but growth will improve in 2024 and outpace most advanced and emerging economies. Overall, we think Middle East GDP will grow just 1.3% this year (0.4pp down on three months ago), but the pace will rise to 3.2% next year, above our global GDP growth forecast of 2.1%. But growth could be significantly lower if the Israel-Hamas war escalates in a way that disrupts oil supplies.

We have halved our forecast for GCC growth this year to 0.7% due to a large negative contribution from the energy sector amid ongoing curbs on oil production. Growth in non-energy sectors has also slowed in the face of higher interest rates, though it remains robust. The PMIs continue to highlight the strength of non-energy economies, particularly in Saudi Arabia and the UAE. New orders remain a key driver of output in both countries, indicating resilient domestic demand despite challenging external conditions. We expect GCC growth to rise to 3.9% next year, with non-energy sectors remaining the key driver.

Energy prices have cooled over the past month despite the ongoing Israel-Hamas conflict. Additional voluntary cuts announced in the OPEC+ November meeting and the pledge by Saudi Arabia to extend its 1m b/d reduction through Q1 2024 did little to bolster prices. The Brent crude price is currently trading below $80pb, down from over $90 in early October and below our average forecast of $83 for this year. Nevertheless, the global supply outlook is tight, and we expect this to support prices next year, with Brent forecast to average $84.4pb in 2024.

Our view on OPEC+ policy this year underestimated the prospect of additional output cuts as oil prices retreated. We now expect GCC oil output to shrink by nearly 5% this year, the weakest performance for the regional energy sector since 2009 (excluding 2020) and weaker than the 3.9% decline we projected three months ago. In Saudi Arabia specifically, we see oil activities contracting by 7.1% this year after a 17.3% y/y plunge in Q3. The energy sector headwinds will carry over into early 2024 as cuts remain in place, though we expect them to unwind later in the year, underpinning regional energy-sector growth of 3.6%.

Non-energy GDP growth delivered favourable surprises this year, particularly in Saudi Arabia and the UAE. The recovery in the regional travel and tourism sector has been especially strong, with visitors in nearly every GCC country rising above pre-pandemic levels. We see further expansion in 2024 and beyond, which will contribute to overall economic growth and resilience to global headwinds. In Saudi Arabia, we expect 27.6m overnight tourists this year, rising to nearly 30m in 2024 and more than 50m by 2032. The government has recently upgraded its 2030 visitor target to 150m (domestic and international), from 100m previously, and aims for the tourism sector to contribute 6% of GDP this year and 10% by 2030. The unified GCC tourist visa, which should come into effect in 2024 or 2025, will further boost visitor arrivals into the region.

Our constructive view on oil production and prices, coupled with the positive momentum in the non-energy sectors, will support GCC budget positions in 2024 after they weakened this year. We forecast the aggregate GCC budget surplus to double next year, to nearly US$36bn, representing 2.1% of projected regional GDP. Fiscal policy dynamics diverged across the region this year as energy receipts came under pressure; some countries, including Saudi Arabia, chose to cushion demand through higher spending, others, like Oman and Qatar, froze or cut spending. But we see higher revenues in 2024 increasing government leeway to support the economies.

We expect average GCC inflation to hover around 2.5% in 2024 following disinflation we've seen this year. This is benign in a global context but not too dissimilar from the average inflation across advanced economies of 2.4% next year and higher than pre-pandemic times. Food, housing and services will continue to fuel upward inflationary pressures. The robust outlook for the non-energy sector has pushed up rental prices and this is resulting in high readings for housing inflation. In Saudi Arabia, housing inflation has averaged nearly 8% in the year to date; by contrast in Qatar, housing inflation readings have now turned negative.

Despite the relatively benign inflation outlook, most GCC central banks will mirror moves dictated by the Fed, consistent with the currency pegs to the dollar, implying an extended period of higher interest rates. Our baseline assumes rates will come down only towards the end of 2024. This will maintain the headwind to lending, though we continue to expect the overall investment drive across the region to support non-energy GDP growth of 4% in 2024, little changed on this year.

The 2024 outlook for the rest of the Middle East is little changed but faces downside risks. For Iran, we forecast GDP growth of 2% this year and next, which represents a slower rate of growth than previous years, as the global economy weakens, and high inflation constrains households’ spending power. A stable rial will only gradually ease the burden on households. In Lebanon, we see the economy contracting 0.2% this year, amid the ongoing political deadlock. Meanwhile, the potential that tensions will escalate on the Israel border is weighing on the outlook and several governments already advise against travel to Lebanon. We see growth recovering to 2.2% in 2024, but the projected expansion would be at risk if Lebanon gets entangled in the conflict. For Iraq, we have maintained our 2023 and 2024 GDP forecasts of 3.9% and 3.6%, though additional pledged cuts in the new year pose a downside risk to both growth trajectory and the fiscal outlook.

Saudi Arabia: Oil output cuts hamper outlook for the economy

  • Economy will contract this year given deep oil production cuts.
  • Non-energy sectors will benefit from investments, driving overall growth.
  • Saudi Arabia will continue to balance fiscal sustainability with economic growth.

We expect Saudi Arabia's GDP growth to contract by 0.5% this year as deep oil output cuts weigh on the economy, after expanding by a strong 8.7% y/y in 2022. Data for Q3 2023 show GDP fell by 4.5% y/y, representing the weakest outcome since 2020, when the country was enduring pandemic-related lockdowns. We expect overall growth to rebound to 4.4% next year as curbs on oil production are unwound and non-oil sectors stay resilient.

We project oil activity growth will fall by 7.1% this year, after a 17.3% y/y decline in Q3. We expect oil output level to stay at 9m bpd until the end of Q1 2024, as Saudi Arabia adheres to its voluntary cut agreed with the OPEC+ group. A longer extension lasting through H1 is also possible. However, we still expect the curbs to unwind later in 2024, translating into a positive contribution to growth from the oil sector, with production rising to 10.5m bpd by the end of 2024. In the medium term, large investment planned by state-owned Saudi Aramco will raise production capacity to a targeted 13m bpd by 2027.

We expect non-oil activities to keep driving growth in Saudi Arabia, expanding by 4.1% in 2023 and 5.4% in 2024. Non-oil GDP growth eased to 3.5% y/y in Q3 and there has been a visible impact of higher interest rates on lending. That said, high-frequency indicators continue to indicate a healthy non-oil economy. The PMIs have averaged 57.7 in Q4, with business activity rising strongly and increasing demand and growth in new orders pushing business confidence to multi-month highs. Point-of-sales transaction values are increasing, with transportation, restaurant and hotel sectors registering annual growth in excess of 10%.

Non-energy sectors will benefit from investments into existing and emerging industries. Saudi Arabia looks likely to be the regional leader with a stream of giga (and smaller) projects. We recently upgraded our medium-term investment forecasts to align with the Kingdom’s investment strategy, which aims to raise investment contribution to GDP to 30% by 2030. The initiatives, fuelled by the sovereign wealth fund, range from expanding the tourism industry to a fund aimed at fostering priority sectors and newly set-up special economic zones to draw in non-oil FDI. Building on a string of international sport investments and a successful bid to host the 2034 FIFA World Cup, Saudi Arabia has won rights to host the World Expo 2030. The event will be an opportunity for the Kingdom to showcase the achievements of Vision 2030 and contribute directly to the Vision 2030 target of boosting tourist arrivals, which was revised up last month to 150m visitors. The government hopes the tourism industry will contribute 6% of GDP this year, rising to 10% by 2030.

Continuous investment will create jobs, supporting demand. Latest data point to double-digit employment growth among both nationals and foreign workers across various sectors in Saudi Arabia, with average earnings growing by nearly 5% in H1. Labour market policies since 2017 have brought many women into the workforce – at 34.1% in Q2, the female participation rate is above the Vision 2030 target of 30%.

Saudi Arabia will continue to balance fiscal sustainability with economic growth. Government spending is estimated to increase to SAR1.3trn this year from SAR1.2trn in 2022, despite pressure on revenue. Capital spending rose by over 20% y/y in Q1-Q3 as the government progressed with its diversification projects. The draft 2024 budget suggests these trends will continue. Given our oil price and production assumptions, we anticipate a fiscal deficit of around 2% of GDP this year, narrowing to -0.5% in 2024.

Inflation has continued to trend downward since the start of the year to reach 1.6%. Residential rents remain the main driver of inflation due to a high weighting of around 21% of the consumer basket, with pressures being offset by declines in furnishing and clothing, and footwear prices. We forecast average inflation at 2.4% this year and 2.6% in 2024, as government-imposed price controls continue to limit price rises.

UAE: Government policy prioritises non-energy development

  • GDP growth set to double to 4.8% next year on oil and non-oil boost.
  • We see a stable fiscal outlook with surpluses averaging 5% of GDP.
  • The UAE continues to seek opportunities in the energy transition.

We forecast UAE growth of 2.4% y/y in 2023, amid a drag from the oil sector, and 4.8% y/y in 2024. Production cuts associated with OPEC+ production quotas will continue to hold back overall growth in the near-term, but we expect these to unwind through 2024, especially given the higher reference quota for the UAE.

Our 2023 oil production forecast for the UAE stands at 3.28m b/d, 1.2% down on last year. Oil output has held around 3.25m b/d in recent months, above the UAE’s assigned target. We expect the country to continue to overproduce, even when the target rises in 2024, and project average output at 3.35m b/d in 2024. We see a further rise to 3.6m b/d in 2025, still significantly below capacity around 4.5m b/d.

The UAE has been actively pursuing non-oil sector expansion as part of its development plans, which in the near-term will also be supported by proceeds from a recent sovereign bond sale, which raised US$1.5bn. Moreover, the UAE will join the BRICS bloc in January, helping the country to achieve its growth and diversification plans by increasing trade and investment opportunities. We think logistics, technology, infrastructure and finance will be among the key beneficiary sectors. We forecast its non-energy GDP growth will ease moderately to 3.8% in 2024 from 5.2% this year.

UAE GDP expanded by 3.7% y/y in Q2 owing to the strong non-oil sector, with high-frequency indicators highlighting ongoing resilience. At 57.7 in October, the PMI reading was the strongest for the UAE since the coronavirus pandemic and reinforces our view that the non-oil economy will maintain robust growth. In contrast to the rest of the region, the pace of credit growth has trended up this year, despite higher borrowing costs, with retail loans growing by nearly 10% y/y.

The UAE’s fiscal outlook is positive with projected fiscal surpluses above 5% of GDP in the near- and medium-term. In 2022, its fiscal surplus exceeded 9% of GDP, the second largest in the region after Qatar, with impressive revenue growth of 31.8%, driven primarily by higher oil revenues. That said, the strong non-oil sector growth has underpinned an alternative, less volatile revenue stream, with streamlined tax services enabling more effective collection and monitoring.

The UAE has also ventured deeper into green sukuk financing space, lending support to its "cooling pledge", with the funds raised being allocated to sustainable projects. The UAE pioneered the region's net-zero path and has actively pursued green solutions by targeting sustainable growth and reducing its carbon footprint, while also aiming to become less dependent on the volatile oil sector. We think the UAE will continue to seek opportunities in the energy transition.

Country-wide inflation data will likely be published in bulk for the year, as in 2022. In Dubai, inflation surged to 4.3% in October, marking a seven-month high. Housing is now the main source of upward pressure, but transport inflation is again positive for the first time since February. If oil prices remain near current levels, then it is likely that headline inflation will rise further in coming months before subsiding in H2 2024. We expect inflation to average 3.1% next year after 3.2% in 2023. Despite a relatively stable inflation outlook, we think interest rates will remain at current levels into H2 2024, with the impact of tight domestic monetary policies weighing on consumer spending and non-oil GDP growth.

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