Marlies van Boven
The Gulf Cooperation Council (GCC) area has so far withstood global challenges, with year-on-year GDP growth accelerating to 6.9% in 2022, driven by high oil prices and stronger growth rates in non-oil sectors. But important reforms to move away from an oil-dominated economy will be key to assure the region’s economic prospects.
While lower than in 2022, the Gulf states are still expected to grow by a real GDP of 3.7% in 2023, a significantly higher level compared to the contraction of 2.9% predicted globally. The UAE is forecasted to deliver the highest growth rate of 4.1%, with higher oil receipts bolstered by income from international tourism, a favourable business climate and recent bilateral free trade agreements with Asian partners. In turn, Kuwait is set to register the slowest pace of growth among its GCC peers at 2.0%, compared with 8.8% last year, reflecting its reliance on oil production and market demand.
Figure 1. Annual real GDP Growth YoY (%) GCC Countries
Source: Refinitiv. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
Improving inflation outlook
Inflation rates in the Gulf Cooperation Council countries remain below the regional and global levels and are subsiding faster, expected to average about 2.7% in 2023, down from 3.2% in 2022. The strong dollar has dampened the import costs of the US-dollar pegged currencies in 2022 and inflation was further suppressed by food and fuel caps and other subsidies lowering the cost of living for households.
Qatar, whose inflation surged to 5.9% in December, was more persistent than its GCC peers, following the hosting of the FIFA World Cup, which drove up prices of culture & recreation and hotels & restaurants. However, it eased to 4.2% in January 2023.
Figure 2. Annual CPI Rate YoY (%) GCC Countries
Source: Refinitiv. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
Even after the additional spending on inflation mitigation programmes, the rise in hydrocarbon prices led to windfall increases for most oil exporters in 2022. Government lending as a percentage of GDP has fallen across all regions. The exception is Bahrain, where political and social tensions have delayed necessary fiscal reforms.
Figure 3. Public Debt as % of GDP
Source: Refinitiv. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
Reducing reliance on hydrocarbon prices through Reforms
Oil dominance boosts GCC’s economy in 2022 but reforms set the stage for its future prosperity.
The major source of fiscal revenues for the GCC countries are their export earnings from oil. While the price of oil has declined, it is still higher than pre-pandemic levels and the futures markets predict prices to stay elevated in 2023, supporting the GCC economies.
Figure 4. ICE Futures Oil futures curve
Source: ICE, Refinitiv. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
Wealth has gone up and down with demand for their main export commodity, as changes to GDP moved closely with changes in the oil price. A reform programme has been instigated to reduce the region’s reliance on oil markets, Reform has led to diversification to non-oil industries such as services and manufacturing.
Figure 5. Quarterly year-on-year growth in GDP (GCC region) and price of Oil
Source: Refinitiv, February 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
An example of this can be seen during Covid, when GDP growth from non-oil sectors accelerated in 2021, after Covid reduced demand for oil and gas. Surging commodity prices, doubling GDP growth in 2022, dwarfed non-oil growth over this period.
Figure 6. Real GDP growth and real non-oil GDP growth
Source: IMF, November 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
The combination of oil prices weighing heavily on fiscal revenues and the potential headwind of a global slowdown highlight the importance of a more diversified economy and continued reforms.
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