28 July 2016
* This year's median growth forecasts cut for most GCC states

* Next year's forecasts reduced for five countries

* Data showed Saudi non-oil sector shrinking in Q1

* Budget deficit projections trimmed for most of GCC

* But forecasts worsen for Oman and Bahrain

By Andrew Torchia

DUBAI, July 28 (Reuters) - Economists have cut growth forecasts for most of the rich oil exporting countries of the Gulf as non-oil business activity slows because of government austerity measures, a quarterly Reuters poll found.

Last year, growth in the six-nation Gulf Cooperation Council began to lose steam as governments reduced spending to limit big budget deficits caused by cheap oil.

This year, those austerity measures - including cuts to energy price subsidies, smaller bonuses for state employees, and higher taxes and fees - are starting to make a major dent in consumers' income, slowing economies further.

Median forecasts for gross domestic product growth this year have been cut for four of the six GCC countries, including the biggest, Saudi Arabia and the United Arab Emirates, the poll of 18 economists showed. Forecasts were cut for next year's growth in five countries.

In Saudi Arabia, the median prediction for GDP growth this year was lowered to 1.2 percent from 1.5 percent in the last Reuters poll, conducted in April. Growth in 2017 is now expected to be 1.7 percent instead of 1.9 percent.

First-quarter Saudi GDP data, released by the government earlier this month, showed the non-oil sector shrank 0.7 percent from a year earlier, its worst performance in at least five years.

"We think that tighter fiscal policy will continue to weigh on the non-oil sector for the foreseeable future," said London-based Capital Economics, which forecasts growth of just 0.3 percent in Saudi Arabia this year, the second-lowest estimate among the 18 analysts.

"At the same time, growth in the oil sector has slowed sharply in recent months and, given the backdrop of ample global oil supplies, we expect it to remain sluggish for the rest of this year."

In the UAE, the median growth forecast for this year was cut to 2.5 percent from 2.8 percent, and for next year to 2.7 percent from 2.9 percent.

The poll does, however, show predictions for budget deficits in the biggest GCC countries being trimmed - the result of the rebound in oil prices since the start of the year as well as efforts by governments to bring their finances under control.

Economists now expect Saudi Arabia to post a fiscal deficit of 13.5 percent of GDP this year instead of the previous forecast of 15.5 percent; next year's deficit forecast has been lowered to 9.4 percent from 9.7 percent.

However, analysts remain concerned about the outlook for Oman and Bahrain, which they see as the GCC's weakest economies in the face of low oil prices. They have smaller oil and gas resources than their neighbours, and smaller financial reserves.

Oman's fiscal deficit is now forecast at 16.9 percent of GDP this year, instead of the previously projected 16.7 percent, and 11.4 percent next year instead of 10.0 percent.

Bahrain is now expected to run a deficit of 11.2 percent this year, smaller than the 13.5 percent previously forecast, but the outlook for next year's gap has worsened to 12.0 percent from 10.5 percent.

Because of domestic political opposition, Kuwait has held off on introducing painful reforms to curb state spending such as cuts to energy subsidies, though the government has indicated it intends to take such steps.

Partly because of the delay, Kuwait is now expected to run a fiscal deficit of 1.5 percent of GDP next year instead of the 2.1 percent surplus previously forecast. This year's deficit is projected at 5.3 percent.

(Polling by Purnita Deb in Bengaluru Editing by Jeremy Gaunt)

© Reuters 2016