The latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, reveals the region’s economic performance weakened in Q2 as a result of the energy sector lowering oil output. The pace of GDP growth in the Middle East has therefore been downgraded by 0.4 percentage points and is forecast to slow to just 1.7% this year. Despite the slowdown, optimism prevails as the region’s non-oil activity remains robust.

According to the Q3 report, the revised economic outlook reflects the Middle East’s weakened performance in Q2, driven by reduced oil production in GCC countries. Projections for GCC growth this year have been scaled back by 0.5 percentage points to 1.4%. Nonetheless, there are encouraging indicators in the non-oil sector and domestic demand. Businesses have reported growth in their customer base and employment; however, this positive performance may face challenges due to the impending impact of high interest rates on consumption and private investment.

Growth in the region’s non-energy sector is demonstrating significant resilience, primarily fueled by the tourism-related sectors, with data showing double-digit expansion in transport, storage, accommodation and food services. The tourism sector is experiencing rapid growth in Dubai, up 20% from Q1 2023, with a record 8.6 million tourists hosted. Saudi Arabia is also witnessing substantial growth in the sector, with a notable 225% surge since Q1 2022. Both Saudi Arabia and Qatar are anticipated to further boost tourism arrivals, supporting diversification efforts.

Energy prices have seen strong gains with Brent oil price rising to US$90pb, the highest since November last year. This is a result of support by Chinese stimulus measures, robust US demand and deeper supply cuts. Saudi Arabia has extended its voluntary 1mbd production cut through year-end, while Russia also pledged to reduce its oil exports further. Consequently, oil price projection has been adjusted, raising the average Brent oil price estimate for this year to US$83.10, against the forecast of US$81.50pb three months ago.

Hanadi Khalife, Head of Middle East, ICAEW, said: “This quarter has been challenging for the region, marking weaker growth than initially predicted. However, looking forward, the planned inclusion of Saudi Arabia and the UAE into the BRICS group next year is expected to create new opportunities for increased trade and investment. This development will also help reduce their reliance on the US dollar, offering a positive outlook for the future.”

Scott Livermore, ICAEW Economic Advisor, and Chief Economist and Managing Director, Oxford Economics Middle East, said: “The recent energy cuts have had a pronounced impact the economic outlook for this quarter. As a result, 2023 is forecast to be the GCC's weakest year for the energy sector since 2017, excluding the exceptional circumstances of 2020. In contrast, the non-energy sector continues to thrive; we expect 30 million international tourists to visit Saudi Arabia next year with Qatar receiving 3.17 million visitors. The surge in the tourism industry continues to bolster the GCC’s diversification efforts.”

The report also notes the favorable level of GCC inflation in recent months, due to a decline in food and fuel prices. However, despite the outlook of inflation normalizing, interest rates are expected to stay at the same levels as the GCC currency pegs to the US dollar, preventing regional central banks from cutting rates before the Federal Reserve starts its easing cycle.

The Federal Reserve is anticipated to begin cutting rates next near, following a very gradual path once they start. This means borrowing costs in the region will remain high over the near term, leading to a further slowdown in the pace of lending and weighing on non-oil GDP growth. According to the report, non-oil GDP growth is projected to reach 3.9% in 2024, down from 4.3% expected this year.

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About Oxford Economics

Oxford Economics is one of the world's foremost advisory firms, providing analysis on 200 countries, 100 industries and 3,000 cities. Their analytical tools provide an unparalleled ability to forecast economic trends and their economic, social and business impact. Headquartered in Oxford, England, with regional centres in London, New York, and Singapore and offices around the world, they employ one of the world's largest teams of macroeconomists and thought leadership specialists.

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