Economic Update: Outlook weakens on extended oil production cuts

• GCC: Drag from oil supply cuts lingers
• Saudi Arabia: Economy will return to growth this year
• UAE: Strong non-energy growth to continue this year

GCC: Drag from oil supply cuts lingers

• We have downgraded our 2024 Middle East forecast by 1pp, to 2.2%
• Non-energy sectors continue to drive GCC recovery
• Fiscal support will be constrained by downward pressure on government revenue

Our baseline assumes a soft economic landing for the global economy this year, with gradual rate cuts coming in due course. That said, global GDP growth will likely be subdued by past standards, at 2.3%, as both advanced and emerging economies slow. Our outlook for the Middle East is also cautious, though we continue to expect growth this year to be stronger than in 2023. We forecast Middle East GDP will grow 2.2% this year (1pp down on three months ago), following an estimated expansion of 1.5% in 2023. We consider the balance of risks to the outlook to be to the downside: A slow recovery in China’s oil demand could contribute to further extension in oil supply restrictions. Meanwhile, there is a risk of a wider regional conflict and a threat of a sustained decline in Red Sea shipping traffic. Our baseline scenario assumes shipping disruptions persist for six months.

We have cut our forecast for GCC growth this year to 2.7% (from 3.9% three months ago) after curbs on oil production were extended, undermining recovery prospects in the regional energy sectors. We expect downward pressure on growth from the energy sector to be partly offset by the ongoing expansion in non-energy sectors. The PMIs still indicate a strong performance of the non-energy side of the economy amid robust business activity and new orders. Still, the disruption to shipping routes through the Red Sea and Suez Canal has pushed up freight and raw material costs, suggesting possible loss of momentum in the coming months. We estimate GCC economy grew 0.6% last year.

Commodity prices have been little affected by the Red Sea trade disruptions, though attacks on transiting vessels have the potential to push prices higher. We now expect global oil demand to contract this year, while we projected modest growth three months ago. We still see oil supply picking up but have pushed back our call for OPEC+ to wind down their production cuts from Q2 to Q3. Consequently, we have cut our 2024 Brent crude oil price modestly relative to three months ago, to $79.3 ($83.1 before). We expect prices to be supported at similar levels in the medium-term.

Our updated view on GCC energy sector performance this year incorporates the extension by the OPEC+ group of voluntary output cuts through Q2 and a shallower rebound thereafter. The deep drop in GCC oil output last year, when the cuts were introduced, creates a very low base, so even though cuts will remain in place for longer, the regional energy sector will grow this year. We forecast aggregate expansion of energy sectors of 1.3% this year, up from a 5.7% decline last year. In Saudi Arabia specifically, we see oil activities growing by 0.7% this year after a 9.5% y/y plunge in 2023.

Non-energy sectors will continue to benefit from government and private investment. Saudi Arabia will push forward with Vision 2030 by pumping funds into giga and mega projects and start to turn its attention to Expo 2030 and the FIFA World Cup 2034. Investment activity is expected to be strong in the UAE too as plans around ‘We the UAE 2031’, Dubai Economic Agenda D33, and other strategies are implemented. Meanwhile, the announcement in Qatar that additional LNG capacity expansion is planned for the latter part of this decade will have a positive medium-term impact.

Fiscal policy at a regional level will be relatively unsupportive this year, limiting recovery prospects. Our updated view on oil production and prices means government revenue will remain under pressure this year. Although the aggregate GCC budget position will likely be balanced this year, it will take until 2025 to return to surplus. The UAE will not endure the tighter fiscal outlook experienced in other parts of the region and world and we expect the government will continue to support growth. We also expect Oman and Qatar to run budget surpluses this year albeit smaller than in 2023.

The aggregate inflation picture remains benign, with average GCC inflation around 2.2% currently. There are no signs as yet of renewed pressures stemming from higher input costs, with housing remaining the primary driver of inflation amid rising rents. This is especially the case in Saudi Arabia and the UAE, where housing inflation remains near 8% and 6%, respectively. That said, in Qatar, housing prices are falling compared to this time last year. Overall, we continue to forecast average GCC inflation at 2.5% this year, compared to 2.6% in 2023.

The better-than-expected news on inflation over recent months has taken the prospect of additional rate hikes off the table for the Federal Reserve and, hence, for GCC central banks. We expect the first cut to come in Q2, with interest rates moving gradually lower thereafter. Looser monetary policy will help stimulate regional credit growth and momentum in the real estate sector and support domestic investment.

The 2024 outlook for the rest of the Middle East faces growing headwinds from the war in Gaza and Red Sea trade disruptions. Iran’s economy rebounded in 2023 thanks to an increase in oil production and a resilient consumer but will slow sharply this year, to 1%, as the export sector is challenged by the slowdown in China. Meanwhile, the prospects for any meaningful sanctions’ relief are low before the US Presidential Election later this year. In Lebanon, the tensions on the southern border and the fears of the conflict spreading remain a major headwind to any significant improvement in the economy. We have maintained our GDP forecast of 2.2% this year, but this is conditional on the security situation stabilising. The domestic political vacuum is also weighing on the recovery prospects. For Iraq, we still forecast 2024 GDP growth of 3.6%, but with oil production reduced further, the growth trajectory and public finances face downside risks.

Saudi Arabia: Economy will return to growth this year

• Economy contracted 1.2% in 2023 but will return to growth this year
• Non-energy sectors will drive overall growth amid strong investment push
• The revised Vision 2030 timelines highlight fiscal prudence

We expect Saudi Arabia's GDP growth to grow by 2.1% this year (down from our projection of 4.4% three months ago), supported by a strong non-oil economy and an unwinding of oil cuts from Q3. Data for Q4 2023 show GDP fell by 3.7% y/y, following a 4.4% contraction in Q3. Overall, 2023 GDP growth therefore fell by 1.2% compared to 8.7% growth in 2022. It was the weakest outcome since 2009 if we exclude 2020. Oil production cuts were the main drag on growth, with oil sector activities contracting by 9.5% (versus a 7.1% contraction we projected three months ago). Non-oil activities slowed to 4.3% and government activities to 1.8%.

We now anticipate that the cap on oil production will be extended through Q2 before gradually unwinding from Q3, a quarter later than we thought previously. Consequently, we project oil activity growth will recover to 0.7% this year, from the 9.5% contraction in 2023. Oil production was around 9mn b/d in January, in line with the voluntary commitment cut for Q1 2024. Barring the pandemic period, this remains the lowest oil production by the Kingdom since 2011. Output will likely rise more gradually into next year following the recent directive from the Ministry of Energy for state-owned oil producer Aramco to pause its plans to increase production by 13mn b/d by 2027, and instead hold production capacity at the current 12mn b/d. News sources indicate that the Kingdom plans to sell further shares of Aramco this year, amounting to a total of US$20bn.

We expect non-oil activities to keep driving growth in Saudi Arabia, expanding by 5.4% this year, up from 4.3% in 2023. The PMI fell slightly in January though stayed firmly in expansionary territory. This confirms ongoing strong business activity despite the shipping disruptions through the Suez Canal. Point-of-sales transaction values signal robust demand, with transportation, restaurant and hotel sectors registering consistent double-digit annual growth.

In mid-December, the government revised its ambitious Vision 2030 deadlines, reflecting a more pragmatic and fiscally prudent approach. Simultaneously, authorities unveiled a strategic economic initiative, offering a 30-year tax relief to global firms establishing regional headquarters in the Kingdom. The initiative seeks to boost FDI, aligning with Saudi Arabia's ambitious target of FDI accounting for 5.7% of GDP by 2030. Data from Q3 last year show that inflows of foreign direct investment rose 29.1% q/q to around SAR8bn. We expect the implementation of various tax incentives will help boost foreign investment in the near- to medium-term and complement the domestic investment drive fuelled by the sovereign wealth fund (PIF). The fund’s domestic investment is due to rise to US$70 billion in 2025, which will be partly financed via external borrowing. The Fund has raised $7bn year-to-date from issuance of conventional and sukuk bonds.

Budget data for 2023 shows total revenue reaching SAR 1.21tn, including a 28% increase in oil revenues and a 12% fall in non-oil revenues. Government spending reached SAR 1.29tn, resulting in a budget deficit of SAR 81bn, equivalent to 2.1% of GDP. 75% of the deficit was funded by raising funds from external sources, while the remaining amount was raised from the local debt market. Based on our oil price and oil production projections, we expect the budget deficit to widen to 2.7% of GDP this year and the Saudi's fiscal position to remain in deficit for most of this decade.

The Kingdom will continue to raise money abroad to fund the fiscal deficits, with the remainder financed from the local debt market. In January, Saudi Arabia raised US$12bn in its largest bond sale since 2017. The bond issuance was oversubscribed, confirming the market's confidence in the Kingdom's creditworthiness captured in rating upgrades from Fitch and S&P last year. The proceeds from the bond issue cover about half of the projected borrowing needs this year as the government continues to spend on diversification projects. These include initiatives aimed at tourism sector growth, with the Tourism Ministry recently doubling its 2030 tourism target to 150mn. The Kingdom welcomed 106.2mn visitors last year, up 12% on 2022. 

Inflation has been relatively stable around 1.5% in recent months. In January, the housing, communication, and recreation sectors witnessed an uptick in prices while prices eased in food and health sectors during the month. Looking forward, while we expect overall inflation to remain low compared to global levels, some upward pressure is expected led by higher input costs and rising supply chain risks. We forecast inflation to average slightly higher this year at 2.4%, compared to 2.3% in 2023.

UAE: Government policy prioritises non-energy development

• Red Sea shipping disruption won't derail strong growth
• Non-energy GDP growth for 2024 revised up to 4.3%
• Removal from ‘grey list’ will spur financial market activity and FDI

We expect UAE GDP to expand 4.4% this year (0.4pp less than three months ago). We expect a modest slowdown in non-energy GDP growth to 4.3% this year. This will follow strong performance from last year. The 2023 Q3 GDP data by Abu Dhabi Statistics Centre showed the emirate's non-oil GDP expanded by 7.7% y/y. This brought growth in Abu Dhabi’s non-oil economy to 8.6% over the first nine months of 2023. Meanwhile, GDP for Dubai grew by 3.3% y/y in the same period. Taken together, we estimate that UAE’ s non-oil GDP expanded by 5.6% in 2023 as whole, driving overall GDP growth of 3%.

Our 2024 oil production forecast for the UAE stands at 3.4mn b/d, 2.9% up on last year. Oil output has averaged 3.21mn b/d in recent months and we think significant unwinding of some of the past year's cuts to oil production is unlikely until H2. Abu Dhabi's industrial strategy aims to double the manufacturing sector by 2030, and the Abu Dhabi National Oil Company (ADNOC) has ramped up investment in oil production and new energy sources, such as hydrogen.

Growth in the non-oil sector was robust last year and we expect the strong performance has continued in early in 2024. High-frequency data and anecdotal evidence support our projection. The PMI for the non-oil sector remained strong at 56.6 in January, conforming to the expansionary trend of the past few years. Compared to elsewhere in the region, the conflict in the Red Sea has had a more muted impact on delivery delays and shipping costs in the UAE. Yet, recurring attacks in the Red Sea present an increasing risk to activity. Supply-chain performance is moderating, and businesses have reported higher transportation costs and delays, compounded by concerns of rising geopolitical tensions.

The Financial Action Task Force has removed the UAE from the money laundering 'grey list,’ signalling the country's commitment to transparency and anti-corruption measures. Consequently, the UAE is no longer subject to additional scrutiny from the Task Force, which tackles illicit financing. This development underscores the UAE's commitment to transparency and anti-corruption measures, aligning it with its GCC counterparts. This will boost the country's reputation and attract more foreign direct investment, projected to reach 5.8% of GDP in 2024. The UAE achieved second position in UN global rankings for greenfield investment in 2023, only behind the US, boasting a 28% surge in greenfield FDI inflows. Total FDI inflows to the UAE are estimated at about AED90 billion (US$24.5 billion) for 2023 with sustained further growth in FDI needed to achieve the government's target of AED550 billion (US$150 billion) by 2031.

The tourism sector will remain key to the country’s growth agenda. The latest data show Dubai International Airport welcomed 86.9mn passengers last year, above pre-pandemic numbers. We expect the number of international overnight visitors to increase by 15% this year. Meanwhile, real estate is still outperforming, and the value of Dubai property sales hit a decade high in January

The UAE will continue to broaden trade relations. The UAE recently signed an agreement with India in the wake of the previously announced trading route through the Middle East to connect India and Europe. The latest deal highlights deepening economic ties between the UAE and India, following the former's joining of the BRICS bloc in January. However, elevated regional instability has put the cross-regional corridor on hold. Overall non-oil trade reached a historic mark of US$953bn last year. Total non-oil merchandise exports increased by 16.7% y/y, with China remaining the country's leading trade partner. We expect growth in non-oil exports to stay robust at 7.2% this year.

Despite OPEC+ extending production quotas, revenues from the oil sector will remain robust and enable the government to support overall GDP growth this year. We forecast fiscal surpluses above 4.5% of GDP this year and next. In December, S&P Global Ratings reaffirmed Abu Dhabi’s robust AA/A-1+ credit rating with a stable outlook, citing proactive policymaking and diversification away from the hydrocarbon sector.

Nationwide inflation data for 2023 remain unavailable. In Dubai, inflation picked up to 3.6% in January, from 3.3% in November and in December. The reading is still below the recent peak of 4.3% in October, as falling fuel prices offset stubbornly high food price inflation. We expect commodity prices to cause less volatility in the headline inflation rate this year but think inflationary pressure from the real estate sector will remain. We forecast inflation will average 2.8% in 2024 after it reached 3.3% last year.