GCC economy on growth trajectory this year but some risks remain

From an economic perspective, 2023 was a good year for the GCC.
Higher interest rates and slowing global growth appeared to have little impact on regional non-oil economic activity, which was underpinned by significant investment, some population growth and a continued rebound in post-coronavirus travel and tourism.
Internationally, growth slowed last year but the deep recession that had been feared at the start of 2023 was avoided.
Major developed market central banks appear to be winning the battle against inflation with consumer price index falling back to the low single digits in the US, the UK and the EU, from peaks of more than 10 per cent for the UK and EU in 2022, and more than 9 per cent for the US.
In 2024, the International Monetary Fund expects global growth to slow slightly to 2.9 per cent from an estimated 3 per cent in 2023 as tight monetary policy continues to weigh on consumption and investment, particularly in the first half of the year.
This scenario is consistent with softer demand for oil, particularly in advanced economies, and oil sector gross domestic product growth in the GCC will remain a drag on headline GDP growth in 2024 as Opec+ production curbs continue.
Emirates NBD expects oil prices to average $82.5 a barrel this year, similar to 2023, based on balanced supply and demand dynamics this year, notwithstanding any geopolitical risk premium.
However, we think non-oil growth across the GCC will remain relatively robust, averaging 3.6 per cent in 2024, underpinned by continued investment as oil-exporting countries push ahead with ambitious economic diversification programmes.
While government spending growth will probably be more modest this year than over the past couple of years, we do not expect governments to cut spending or tighten fiscal policy through higher taxes (other than those already announced such as the UAE’s corporate income tax, which came into effect in mid-2023).
In addition, economic and social reforms are expected to support continued private sector investment and growth in the expatriate population, particularly in Saudi Arabia and the UAE.
Rate cuts from the US Federal Reserve and other major central banks, expected in the second half of 2024, should also support investment and consumption.
Finally, tourism is expected to remain a key driver of economic growth in the region in 2024 (and beyond), with the return of visitors from China and the growth of the Saudi tourism sector off its relatively low base.
There are some risks to the growth outlook, not least the recent escalation in geopolitical tension in the Middle East and subsequent disruption to shipping routes via the Red Sea, which have pushed up freight costs to levels last seen in 2022 and could result in longer delivery times.
Supply chain disruption and potentially higher energy prices, if sustained, pose upside risks to inflation in developed markets and could delay monetary policy easing. An escalating conflict may also deter tourism to and within the region, which would pose a downside risk to growth.
So far, the impact of the shipping disruptions on the oil price has been limited, with concerns about weak demand seemingly outweighing the risk of a material disruption of energy supplies.
For GCC oil exporters, any boost to oil prices would be beneficial for budgets at the margin. In our base case scenario, Saudi Arabia’s budget deficit is set to widen to more than minus 4 per cent of GDP this year as oil revenue reflects the impact of extended production cuts, while ambitious development plans will require continued investment spending.
Bahrain and Kuwait are also expected to run small budget deficits this year but Oman, the UAE and Qatar are still expected to record surpluses.
Overall, sovereign balance sheets in the GCC are much stronger than a few years ago, with lower public debt and healthy foreign currency reserves, which should allow governments to tap capital markets at attractive rates, if needed.
Saudi Arabia has already taken advantage of lower yields to issue $12 billion worth of bonds last week to finance some of its expected budget shortfall.
Khatija Haque is chief economist and head of research at Emirates NBD