Q4 2022: The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: Regional growth set to slow as global economy enters recession
- GCC: Outlook deteriorates on weaker global demand
- UAE: Growth and inflation to ease back in 2023
- Qatar: Non-oil sector drives strongest growth since 2015
GCC: Outlook deteriorates on weaker global demand
- Oil production to stagnate in 2023, driving slower growth
- Rising cost of borrowing look set to dampen non-oil activity
- Inflation has peaked in the region and will come down next year
We have revised down our GDP forecasts over the past three months and pencilled in a global recession for early next year, as inflation squeezes household real incomes, borrowing costs soar, winter threatens Europe's energy supply, and China’s growth engines stutter. The Middle East has so far withstood global challenges, mainly due to GCC countries' ongoing gains from trade. However, demand is slowing, and agreed oil production cuts and rising borrowing costs will dampen growth. We have lowered our 2023 GDP growth forecast for the Middle East by 0.6ppts to 2.7%. This is still more than twice the pace we forecast for the world economy, but down from 5.8% projected for this year, the fastest expansion since 2011.
The downgrade reflects more muted projections for activity in the GCC economies where we now see GDP growth slowing to 2.5% in 2023 (we forecast 4.0% growth three months ago) as oil production stagnates. This will represent a significant slowdown from the 7.1% projected for this year, upgraded from 6.7%, due to stronger than-expected Q3 momentum. It will, however, still be above the average pace in the five years preceding the pandemic. Meanwhile, we expect growth to remain subdued in the rest of the Middle East region, including in Iran, where domestic unrest will continue to have a negative impact upon business activity.
We've lowered our commodity price estimates, with Brent forecast to average US$92.1pb in 2023 against our forecast of US$96.1 three months ago. Our 2022 oil price projection has also been adjusted down, to US$102 (from US$103.8). Oil prices are well off their Q2 2022 peaks, fluctuating around $90pb in recent weeks, balancing ongoing fears over the impact of China’s zero-Covid policy on demand with concerns over supply after OPEC+ cut production by 2m bpd in November, the largest cut since 2020. In our view tight supply will continue to support prices despite recession across many advanced economies.
Only Saudi Arabia has reported Q3 GDP so far, which showed growth remained strong at 8.6% y/y after reaching an 11-year high of 11.8% y/y in Q2. The expansion was boosted by oil activities as the economy benefits from both higher oil prices, which averaged $100.7pb in Q3, and higher production, at 10.9m b/d. Saudi Arabia will likely be one of the fastest growing economies in the world this year. Moreover, regional PMIs for October indicate GCC economies are off to a good start this quarter and domestic economic conditions across the Gulf should remain strong heading into 2023, helped by rising new orders and easing price pressures. This should support business sentiment and further improvement in the labour markets – in the UAE, jobs are being created at the fastest pace since July 2016.
The FIFA World Cup has driven demand for travel and tourism in Qatar and across the GCC region this year, underpinning non-oil recovery. Although only Qatar will see the number of visitors this year return to 2019 levels, its neighbours will also benefit. Outside of Qatar, we expect Dubai to see the greatest boost to tourist arrivals and the non-oil economy as the event takes place, not least given the high share of tourism and travel in the economy. Qatar's neighbours are running frequent shuttle flights (estimated at 500 daily) to capitalise on demand against the backdrop of the host's accommodation shortage.
The fiscal impact of robust oil activity continues to be visible in budget data though data from Oman and Saudi Arabia, the only two countries where Q3 figures are available, highlight that oil revenue has declined from Q2 peaks. We expect a surplus of 9.3% of GDP for the GCC region as a whole for 2022, the highest since 2012. The fiscal accounts are expected to remain healthy in 2023, supporting a further decline in debt-to-GDP ratios, though we see the surplus narrowing to 8.2% of GDP.
With global commodity prices falling, we expect a positive impact on regional inflation due to the high share of food and fuel in CPI baskets. Recent inflation figures for several of GCC's economies show price pressures have peaked in the region and inflation is beginning to come down, with strong declines in Dubai and Kuwait and smaller falls elsewhere. Qatar continues to see its inflation rising, given pressures stemming from the World Cup, but trends should reverse in early 2023. We forecast GCC inflation at 3.5% this year, up 0.2pp on three months ago, before it slows to 2.6% in 2023 and stabilises around 2% in the medium term.
Although inflationary pressures are easing, central banks across the GCC will want to protect the currency pegs to the US dollar, mirroring moves by the US Federal Reserve, which we expect to continue to hike interest rates into next year. Although the pace of tightening will likely slow from December, rates will likely be lifted higher than we thought before. This is a factor behind our expectations of non-oil GDP growth in the GCC slowing to 3.6% next year from 5% in 2022.
Elsewhere in the Middle East, the Iranian economy is being hampered by two negative shocks with an unlikely short-term resolution to either: a wave of public protests, which have caused widespread disruption to businesses, and the prolonged impasse over talks to revive the nuclear deal. Without a deal, growth in the economy will be severely constrained as the revenue from oil exports remains a key pillar in government finances. We have maintained our 2022 and 2023 GDP growth forecasts at 2.5% and 2.0%. In Lebanon, political disarray continues to weigh on the economy, with business expectations close to rock bottom. This underpins our view that the economy will contract 0.8% this year, down from a projected 0.3% expansion three months ago. Our 2023 GDP forecast is at 2.2%. For Iraq, we have maintained our 2022 GDP growth forecast at 7.7% and then expect it to ease to 4.3% in 2023 due to expected oil cuts and the persistence of price hikes and political unrest.
UAE: Growth and inflation to ease back in 2023
- GDP growth will slow to 2.7% in 2023, from 7.5% this year
- The non-oil sector should maintain resilience, growing 3.9% in 2023
- New development strategy revealed to make the country the next tourist hotspot
Following the 2m bpd cut in OPEC+ production targets at the October meeting, we now expect UAE oil production to be broadly flat in 2023 compared to 2022, following expansion of nearly 15% this year. This will contribute to a significant slowdown in UAE GDP growth, which is seen falling back to 2.7% next year from 7.5% this year.
That said, non-oil GDP growth is holding up against the headwinds of higher inflation and interest rates. Expo 2020 and the easing of Covid-related restrictions gave the economy a boost early this year and as indicated by the manufacturing PMI for the non-oil sector, which stood at 56.6 in October, momentum has remained at a similar level throughout 2022.
Tourism numbers are bouncing back strongly. Dubai is again the world's busiest international airport and total visitors to Dubai stood at 9.1m in the first eight months of 2022, compared to 3.2m over the same period in 2021. Growth in tourism received an additional boost from the World Cup in Qatar, as Dubai proves to be the most popular choice for fans to stay outside of the host country. The recently-launched National Tourism Strategy 2031 will target $27bn of investment with the goal of welcoming 40m hotel guests a year and raising the sector's contribution to GDP to $122bn (from $99bn currently). In light of this, we expect tourism arrivals to grow by an average of 10% per annum between 2023-2030. The strategy is a part of the ‘we the UAE 2031’ development vision, which contains ambitious targets such as doubling GDP as well as becoming a leading player in new industrial sectors, scientific innovation and hydrogen. It builds on policy initiatives seen in recent years and readies the UAE for a decade of strong growth and diversification.
Meanwhile, real estate continues to perform strongly, with Dubai property transactions hitting decade highs in recent months. Beyond real estate, there has been a push to deepen capital market growth in Abu Dhabi and Dubai. Despite equity prices being caught up in global market uncertainty, the flow of IPOs on to emirates' local bourses should maintain relatively strong performance of local equity markets.
Key to this resilience has been policy support from the government that is stimulating investment and increasing the attractiveness of the UAE economy. Although oil prices have fallen back from their highs of earlier in the year, they remain above breakeven levels and, combined with the UAE's strong financial position, indicate the government can maintain its supportive stance. That is underscored in the recent federal government budget, which included a rise in expenditures in 2023. We expect non-oil GDP growth to expand by 3.9% in 2023 after growing 4.8% in 2022.
The UAE also has an ambitious agenda to increase FDI through economic and trade agreements. Specifically, the UAE has signed comprehensive economic agreements to strengthen ties with India and Israel. The deal with India aims to increase bilateral trade to more than $100bn over the next five years. Just months after the accord, an Abu Dhabi holding company announced a $2bn investment into India's green infrastructure, and this is likely to be the first of many deals.
There are signs that inflation has peaked in the UAE. Recent data for Dubai show inflation slowing to 4.6% y/y in October, down from the 7.1% peak in July. Lower food and beverage prices have been the key driver of inflation easing along with transportation prices, tracking the decline in commodity prices. We expect these trends to continue and for UAE inflation to average 5.6% this year before easing to 2.1% in 2023. But inflation is unlikely to fall back to pre-Covid levels when prices are falling, as growth will support price pressures, particularly in the real estate sector.
Qatar: Non-oil sector drives strongest growth since 2015
- Economy is seen growing by 5.2% this year, the fastest since 2015
- Non-oil sector will be the main driver of expansion, underpinned by the World Cup
- The infrastructure upgrade, coupled with ongoing reform, has the potential to be FDI positive in the medium-term
Concerns about the deteriorating global outlook are yet to overshadow the boost from the World Cup tournament, which lasts until 18 December. The travel and tourism sector will spur 7.6% growth in Qatar’s non-oil economy this year, the fastest pace since 2015. Overall, Qatar’s economy is seen expanding 5.2% this year, followed by a slowdown to 2.7% in 2023.
The manufacturing PMI points to a softening in activity from very high levels. GDP grew by 6.3% in Q2, up from 2.3% in Q1. The pick-up was led by non-oil sectors, which expanded by 9.7% y/y, underpinned by preparations for the World Cup particularly in construction, transportation, wholesale and retail trade, and real estate, but mining output also posted a 1.2% y/y rise.
The World Cup tournament itself will have attracted over 1m visitors, which our estimates show will lift the 2022 total to 2.8m, surpassing 2019 levels. Tourism statistics point to a 19% increase in visitor numbers in Qatar in H1 compared to 2021 overall, thanks to a surge in arrivals from other GCC countries, but also India, the US and the UK. Although there is clearly going to be a slowdown in inbound travel to Qatar next year, the numbers should recover thereafter, supported by a rise in regional arrivals.
Recent data show the working population remains about 100,000 smaller than before the pandemic. However, there's been a steady rise in the number of nationals pursuing employment and education, a trend we expect will likely continue.
The World Cup has played a pivotal part in Qatar's journey to diversify its economy away from the energy sector. By the end of this year, the share of the non-oil sectors in GDP looks poised to reach close to 63%, up from 50% a decade ago.
The event provides an opportunity for the authorities to showcase the upgraded infrastructure and build connections, elevating Qatar's investment appeal and laying the foundations for further diversification that drives annual non-oil growth of about 3% in the years ahead. But the event should not be seen in isolation. Qatar has complemented World Cup-related work with important structural reforms to boost its attractiveness to foreign workers and investment. In addition to expanded special economic zones, these include the property ownership law passed in 2020, which allows foreigners to buy and rent residential or commercial property and is a route to permanent residence. The authorities have also eased rules regulating employment, ending the sponsorship system and introducing a minimum wage in the private sector and foreign investment, allowing 100% foreign ownership of companies listed on the local stock exchange. Ongoing reforms as well as the comparatively strong outlook for public finances, including budget surpluses projected to average 9% of GDP this year and next, will support Qatar’s efforts to broaden the economy, helping fulfill the diversification goals charted in its National Vision 2030.
Meanwhile, recent LNG deals awarded for the North Field gas expansion project will have a positive medium-term impact on the oil and gas sector, facilitating an increase in LNG capacity by almost 65% to 126mtpa by 2027 from 77mtpa now. This will leave Qatar well placed to strengthen its position in the Asian and European gas markets.
The World Cup has driven Qatar's inflation higher, with 2022 projection at 4.5%, versus 3.5% average across the GCC. Upward price pressures from housing are much stronger than elsewhere in the region, as the population has continued to grow. There has also been a significant contribution from the recreation and culture component of the CPI basket. A reversal in this category after the World Cup ends will help bring inflation down to 2.5% next year.
Higher interest rates will contribute to slower growth in 2023. We expect Qatar's borrowing costs will be about 425bps higher by year-end, as the currency peg to the US dollar requires the central bank to track moves by the US Federal Reserve.