Economic Update: Middle East
The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: Middle East outlook improves even as pandemic lingers
Published on 13 December 2020
- Economy in slow recovery mode but won’t return to pre-crisis level until 2022
- Saudi Arabia: Recovery weighed down by the oil sector decline.
- UAE: The coronavirus pandemic continues to challenge recovery.
Uncertainty remains despite positive vaccine news
- Coronavirus has set the Middle East economies back and recovery has lost momentum
- Weak global energy demand maintains pressure on the oil sector
- Tough lockdowns reinforce economic decline in Iran and Lebanon
The global recovery from the COVID-19 pandemic has stalled as a second wave took hold in Europe and elsewhere and virus containment measures have been re-imposed in many economies. This will also weigh on the regional recovery and, after a strong bounce back in Q3, we expect growth momentum to taper into 2021. However, progress on a vaccine bodes well for the easing of restrictions and improvement in the second half of 2021. Consequently, our regional GDP forecasts for this year and next stand at -6.8% and +2.9%, compared to an average pace of 2.6% in 2010-2019.
So far, the GCC region has avoided the tighter restrictions seen in Europe and in some countries in the region such as Jordan and Lebanon. Indeed, with infections largely in check, the GCC countries have continued to ease out of lockdowns. While clearly positive, Google mobility trends show the pace of return to normality has slowed, particularly in the important workplace category, and tourism traffic has also been subdued. Moreover, the oil sector remains a drag on overall growth as countries adhere to OPEC+ production cutbacks. So, with both oil and non-oil sectors facing hurdles, the GCC is set for a large GDP contraction of 5.3% this year, before recovering by 2.4% in 2021.
Middle East: Real GDP in 2020
High OPEC+ compliance with the deal continues to offer support to oil prices, but they are still down 26% from January. The group met at end-November and agreed a modest 0.5m b/d increase in output from January 2021 (rather than the original 2m b/d), and will review the process on a monthly basis to sustain drawdown in inventory levels. Our forecast for Brent crude is US$41.7pb for this year and US$49.3pb in 2021, slightly higher than what we thought back in March. But we believe there is limited upside for oil prices through 2022 and 2023.
Brent crude oil prices
The subdued outlook for oil prices will limit GCC governments’ room to provide fiscal support, preventing growth from returning to end-2019 levels before late 2022, later than most other regions in the world. Regional fiscal buffers were already weakened heading into the dual oil and COVID shock (UAE and Qatar excluded) and budgets have come under further pressure this year amid loss of the dominant oil and gas revenue. Several governments, including Oman and Saudi Arabia, look eager to repair their finances, implying more restrictive fiscal policies in 2021-2022. This will weigh on demand and keep inflation low. But other governments are well positioned to capitalise on lower borrowing costs to fuel recovery even if oil prices stay lower for longer – the UAE getting its federal credit ratings may be an indication of an upcoming issuance.
Moreover, recent vaccine developments boost the chances of consumer-facing sectors such as hospitality and airlines being viable in a year’s time. This should benefit regional countries with a higher share of tourism, such as Bahrain and the UAE, where non-oil economies have struggled to pick up pace and companies have continued to trim their workforce. The burden of job losses has fallen on the expat population, leading to a departure of many workers and a decline in population.
The outlook is no better elsewhere in the region, with Iran and Lebanon, both thrust into renewed lockdowns, looking particularly concerning. The pandemic has compounded economic stress from US sanctions in Iran, which has encouraged panic buying of foreign currencies on the open market. In Lebanon, an explosion in the country’s key port has reinforced the downturn, with GDP seen falling by about 25% this year and further in 2021, as the currency and financial crises reverberate through the economy. It will likely take the country 15 years to regain the 2019 GDP level. Inflation has spiked in both countries against the backdrop of currency devaluation and will be in double digits this year and next. Iraq, with the least diversified economy in the region, will see one of the largest GDP falls among OPEC members.
Saudi Arabia: Recovery weighed down by the oil sector
- Drag from oil production cuts and newly implemented tax measures holds back recovery
- Non-oil economy reels from the collapse in demand
- Saudi unemployment has soared above 15%
In line with global trends, Saudi Arabia has begun to reverse Q2 output loss, but the rebound has been weighed down by the oil sector ‒ preliminary GDP pointed to headline growth of just 1.2% q/q in Q3 (-4.2% y/y). Although disappointing compared with the Q3 bounces seen in the US and Europe, the 7% y/y decline in the Saudi economy in Q2 was much shallower than the global average (-9%) owing to extensive government stimulus measures. Continued public support and an improving health situation should nudge growth higher in Q4, with overall GDP growth at -4% and +2.8% this year and next, respectively. The economy grew by an average of 3.5% in 2010-19, though slowed in the latter part of the decade.
Both the oil and non-oil sectors will end the year below the 2019 level. The country boosted oil production in April when the OPEC+ agreement broke down, which was then subsequently cut back sharply as a new deal was agreed. Oil output reduction will lead to a 4.6% y/y drop in the oil sector GDP, the largest fall since 2009, followed by 1.4% growth in 2021. The non-oil economy is seen declining by 3.6% this year, the first negative outcome in over 30 years. But the PMI gauge moved back into expansion in September and the opening up of travel and tourism should boost momentum more meaningfully in 2021, maintaining the positive trend in point of sales transactions, which has been on an upward trend since the easing of lockdown.
PMI, level, 3 month moving average
On the demand side, we expect capital spending to suffer most in 2020 overall, due to the struggling private sector and reallocations in public spending from capital expenditure to COVID-19-related support and stimulus. As a result, we expect a drop of around 12% in private sector investment in 2020, the steepest fall in decades.
Lower investment may complicate the task of reducing unemployment. The unemployment rate among Saudi nationals soared to 15.4% in Q2, from around 12% in the preceding quarters, the second highest in the GCC, underscoring the scale of the problem. The government took on more people as the private sector came under pressure, but the latter is seen as the key engine of job creation. While there is renewed impetus to replace migrant workers with Saudi nationals, this is a longer-term goal. In the near term, employment creation is unlikely to keep pace with demographic trends, so the domestic unemployment rate is unlikely to fall to the targeted 10.5% in 2022. However, the recent G20 summit, which Saudi Arabia hosted, identified job protection and support for labour markets both during and after the COVID-19 crisis as key pillars of global economic recovery. The near-term economic impact of the event is unlikely to be significant but is difficult to quantify economically.
The oil price slump has weakened public finances – underpinning the 24% y/y decline in total revenue in the year to September. But steps taken to limit the hit to the sovereign balance sheet, such as tripling of VAT to 15% and a hike in import duties, have yielded a strong uptick in non-oil revenue, a key diversification metric under the Vision 2030 agenda. The Ministry of Finance is keen to salvage its pre-COVID medium-term fiscal plan starting in 2021, and fiscal support will wane over 2021.
The sharp VAT hike pushed inflation above 6%, driven by accelerating food and beverage prices as well as transportation costs. Price increases have since moderated but are curbing domestic demand on top of the impact of COVID-19 measures.
Joe Biden’s victory has not changed our near-term assessment of the economic outlook for Saudi Arabia as his administration will uphold relations with traditional allies. But his win will likely yield a more balanced approach to the regional rivalries and a softer stance on Iran.
UAE: Coronavirus continues to take toll on economy
- Both oil and non-oil sectors in deep recession this year
- Expo 2021 underpins hope for rebound next year
- Expected recovery should reverse job losses
This year has been very difficult for the UAE economy with many key sectors challenged by the coronavirus restrictions. Our 2020 GDP forecast of -7.8% marks the weakest projection in over three decades, with both oil and non-oil economies plunging. This should be followed by 1.1% growth in 2021, still weak in a historical context, amid an ongoing oil GDP slump.
Google mobility trends indicate a plateauing of activity over the past couple of months, especially in the important workplace and retail and recreation components. This is consistent with the PMI remaining around the 50-mark that separates expansion from contraction in the non-oil sector and indicates stalling of growth momentum as 2020 draws to a close.
The slow pace of recovery continues to hinder employment dynamics. The employment component of the PMI points to the non-oil sector still shedding jobs. In addition, a recent survey by Mercer, the human resources consultancy, reports that 30% of businesses in the UAE plan to reduce their workforce, with the biggest cuts planned in the retail sector. This indicates that while the expat exodus may be abating, it will not be reversed until next year when a sustained recovery from COVID-19 takes hold. We see non-oil GDP expanding 4.2% in 2021 after an expected 7.4% decline in 2020, only returning to pre-crisis levels in mid-2022.
Travel and tourism accounts for about 16% of GDP in the UAE, both directly and indirectly via its impact on the supply chain and the spending it supports. Hotel occupancy rates are still well below a year ago despite a rise in ‘staycations’ and Tourism Economics expects visitor numbers to fall by nearly 60% in 2020 overall. The postponing of Expo 2020 has limited the rebound in H2 this year, but it does create space for Expo Dubai to achieve its target and make a fuller contribution to growth next year. Expo 2021 should help visitor numbers to rebound next year, but international visitors are unlikely to return to pre-crisis levels before 2023.
Global: Importance of travel and tourism
The updated OPEC+ agreement sees the UAE oil output rising only slightly in January from the production quota for H2 2020. This means the oil sector will continue to be a drag on growth, though output decline will moderate next year and recover thereafter.
Despite oil production cuts and lower oil prices, the UAE has enough financial reserves to maintain fiscal support for the economy through 2021, which should benefit growth in the longer term as well. It does not seem likely that the authorities will significantly increase short-term support for business, but they appear primed to support the economy in the recovery phase. This includes preparation for Expo 2021 and also funding for new sectors such as the digital economy.
The UAE is seeing deflation in the face of weak momentum in the economy with the ongoing decline in rents still the biggest drag on headline inflation. While the authorities have taken measures to tackle oversupply, prices are still falling, albeit at a slower rate. The pick-up in growth expected in 2021 should start to reverse the decline in house prices.
Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.
1 Our Middle East aggregation incorporates Iran, Iraq, Jordan, Lebanon, Saudi Arabia, Syria, Bahrain, Kuwait, Oman, Qatar, UAE, and Yemen.