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Economic Update: Middle East

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

ME economy to slow in 2019: 2019 Q1 summary

  • The Middle Eastern  economy is expected to slow to 1.3% in 2019, weighed down by renewed OPEC-plus oil production cuts, recession in Iran, the third largest ME economy, and only modest pick up in non-oil activity.
  • The UAE’s economy is expected to strengthen to 2.2% in 2019, supported by continued elevated levels of government spending, reform measures and stimulus plans to ease doing business in the UAE, and higher oil production. However, the real estate market remains weak and job creation is still modest.
  • The Saudi economy will grow at a stable pace of around 2% in the coming years. In 2019, record budget spending and various pro-growth government initiatives will ensure faster expansion of non-oil activity, even as oil sector growth slows.

Oil GDP growth in GCC

The Middle Eastern economies recovered from the economic slump that hit the region in 2017 due to low oil prices, growing by an estimated 1.6% in 2018. Economic activity, notably in the GCC, was buoyed by elevated oil production levels, higher government spending, stimulus plans geared to support the private sector and higher oil prices at an average of US$71pb in 2018 – up from the average of US$54pb in 2017. Renewed OPEC-plus oil production cuts and an anticipated recession in sanctions-hit Iran, the third largest ME economy, imply growth in the region will slow to 1.3% this year. 

Non-oil GDP growth GCC

The GCC is expected to see only marginal improvement in 2019. Despite a strong drive in the last few years by the authorities to diversify their economies, oil continues to play a dominant role, constituting up to 46% of total GDP. As such, the renewal of the OPEC-plus oil production cuts on 6 December, which came after a dramatic drop in oil prices from US$86pb in late October 2018 to US$70pb recently, will limit the oil sector’s contribution to overall growth. Moreover, the oil sector will also be dampened by lower oil prices, which we forecast at US$64pb in 2019, down by US$10pb from the average in 2018. The oil price trajectory suggests many GCC countries will struggle to balance their budgets in 2019, as the price needed to cover their expenses is well above the current price forecast, notably in Bahrain and Saudi, which need average oil prices of US$110pb and US$78pb respectively in 2019. 

GCC Fiscal break evens ($ pb)

The non-oil sector in the GCC is expected to be the primary engine of growth in 2019, forecast to grow by 3.1%, supported by higher government spending, notably in the UAE and Saudi, continued reforms and project spending (eg, Qatar’s 2022 World Cup, UAE’s Expo 2020), and stimulus plans geared to support the private sector. Outside the GCC, Iran is expected to see a recession in 2019 amid tightened US sanctions on its vital oil exports, while in Iraq, increases in oil production and improvements in the security and political conditions will contribute positively to overall reconstruction efforts, pushing growth to 3.2%. In Lebanon, after nearly nine months of political deadlock, the formation of the government should help the economy, but the pace of activity is expected to remain weak. 

UAE outlook

Economic activity in the UAE is set to accelerate to 3.1% this year, up from an estimated 2.7% in 2018, buoyed by a pick-up in non-oil activity, rising public spending at the Federal and Emirate levels, higher investment ahead of the highly anticipated Expo 2020 and continued regional economic recovery. Both the oil and non-oil sectors are expected to be supportive of growth this year. The oil sector, which makes up around 30% of GDP, is expected to grow by 2%, while the non-oil sector is set to accelerate from an estimated 3% in 2018 to 3.6% in 2019.

Hotel occupancy by Emirate

But despite general improvements in the macroeconomic environment, the real estate market remained weak throughout 2018 as residential sales prices continued to fall in both Abu Dhabi and Dubai due to strong supply growth in housing, a soft job market and subdued demand. The real estate market slump has weighed heavily on Dubai’s stock market, which was down by nearly 24% y/y in February 2019, while Abu Dhabi’s stock market was more insulated, growing by 8% y/y in January 2019. Real estate market conditions are unlikely to see a notable rebound this year, reflecting strong anticipated supply growth and still sluggish job market conditions. Moreover, job creation slowed from 2.6% in the first three quarters of 2017 to 1.6% for the same period in 2018. More tellingly, key sectors shed some jobs: total employment in services, which accounts for almost 20% of total employment, was down by 1.3% y/y in Q3 2018, while ‘transport, storage & communication’ and ‘manufacturing’ sectors declined by 4% and 1.1% respectively over the same period.  

Saudi Arabia outlook

Saudi Arabia remains firmly on the transition path under the auspices of Vision 2030 – the country’s economic blueprint first unveiled in 2016. The plan has seen numerous reforms being implemented over the past year, including the launch of the 5% VAT and energy price reforms, and will continue to shape the Kingdom’s trade and investment strategy. We see ongoing but slower recovery in Saudi Arabia’s growth as economic and social changes take hold. Higher state spending, which we forecast to rise by 7%, and pro-growth initiatives, will support non-oil growth in 2019, amid continued diversification efforts. 

Preliminary estimates show that GDP grew by 2.2% in 2018, in line with our expectations, a sharp improvement on the 0.7% contraction in 2017. Economic activity was supported both by oil sector expansion and faster growth in the non-oil sector. That said, the construction sector continued to contract for the third consecutive year.. Despite higher fiscal spending, we expect economic growth to slow to 2% in 2019, reflecting renewed OPEC-mandated output cuts and only a modest acceleration in non-oil activity amid a still-challenging business environment.

Saudi oil production and oil prices

The contribution from the oil sector to growth will again weaken in 2019. Saudi Arabia leads the effort to rebalance the global oil market and is shouldering the bulk of the reduction in total output agreed by OPEC and its allies at the December meeting in Vienna. January estimates indicate Saudi authorities slashed production and on average crude output will rise only marginally this year from the 10.3m b/d recorded in 2018. Meanwhile, the Saudi oil export price will likely be lower, weighing on government oil revenue. Nonetheless, with the oil sector accounting for some 44% of total GDP, Saudi authorities are investing heavily in hydrocarbon-related projects, which include large contracts such as the Jizan refinery and the Fadhili gas plant. 

The non-oil sector has been resilient, but momentum remains weak. The Emirates NBD Purchasing Managers’ Index for Saudi Arabia (a gauge of activity in the non-oil private sector) averaged 53.8 in 2018, the lowest annual result in the series and well below historical levels. The index started 2019 on a stronger note and high levels of optimism and recovering credit growth suggest that non-oil activity should pick up this year. We expect growth in the non-oil sector to accelerate to 2.6%, supported by expansionary fiscal policy and the private sector stimulus that was announced in late-2017 and extends up until 2021. The package allocates funds for residential housing, economic projects, SME support, infrastructure development and investment and export financing. 

Labour dynamics deserve a particular mention, however. Hiring activity remains subdued, which over time may complicate the Vision 2030 job growth goals. Reducing the national unemployment rate to 7% by 2030 is a central pillar of the reform plan. The latest employment survey (Q4 2018) highlights the challenge of reaching that goal - the jobless rate among Saudis stands at 12.7% currently and job creation for Saudi nationals has been relatively weak in 2018. This means the private sector continues to struggle to create jobs for locals, despite new policies of expat levies and expat dependent fees that are aimed to encourage Saudization.

More broadly, progress on some key initiatives underpinning the ambitious economic transformation have stalled, including the much-anticipated sale of shares in Aramco. These delays cloud the prospect of attaining the Vision’s other goals, though the authorities will continue to support the private sector in taking a more meaningful role in terms of generating output and employment. This is clearly evident from the government’s budget for 2019, which balances support for economic growth with deficit reduction. In 2018, the introduction of the 5% VAT and hikes in electricity tariffs and gasoline prices led to an improvement in non-oil revenues but raised living costs and put a burden on private sector activity. Households should get some reprieve this year. We expect inflation to decelerate to 1% this year, down from 2.5% in 2018. The pace of monetary tightening will also slow, as we forecast no rate hikes in the US this year, which will keep the cost of borrowing relatively unchanged in 2019.

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.