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Ukraine war may slightly dampen GCC GDP growth: Report

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Key findings: Middle East expansion plans appear robust despite global instability caused by conflict



The latest ‘Economic Insight’ report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, has revealed that while most Middle Eastern countries welcome inflated oil prices, Russia’s invasion of Ukraine has created global uncertainty which may dampen non-oil growth. This has led to a modestly lower ICAEW forecast for GCC GDP growth to 4.8 per cent for 2022, previously 5 per cent.

According to the report, the start of the year saw the pace of activity in the GCC soften due to Omicron concerns. While global uncertainty as a result of the pandemic appears to be subsiding, fears over the potential economic fallout from the Russia-Ukraine conflict have heightened. With oil prices predicted to soar to all-time highs, expansion plans in the region are expected to remain robust, underpinned by increased oil production and strong investment plans.

Although momentum in the non-oil economy has slowed in recent months, hampered by Omicron, it is expected to rebound, led primarily by recovery in the travel and tourism sector, despite visitor numbers only expected to return to pre-crisis levels in 2023. Proven stability in the region has improved investor confidence, which is driving growth in lending and subsequently enabling private sector expansion. ICAEW’s 2022 forecast for GCC non-oil growth stands at 3.4 per cent, up marginally from 3.3 per cent three months ago, but modestly slower than the expansion of 3.8 per cent in 2021.

The predicted slowdown comes in the wake of Russia’s invasion of Ukraine, which has seen a surge in global energy and food prices, as well as mass supply chain disruption. As a result of the increased cost pressures, combined with withdrawal of regional subsidies and growing domestic demand, inflation is predicted to rise in the GCC to an average of 2.7 per cent from 2.3 per cent in 2021, before falling below 2 per cent in 2023.

Food inflation and shipping disruptions will be of concern to the region, although the impact of high inflation on growth will be offset by higher oil output, as part of the Opec+ plans of steadily increasing oil output.

Vanessa Heywood, ICAEW Head of Middle East, said: “The GCC’s oil producers stand to benefit from the surge in oil prices, with fiscal deficits narrowing or even turning into surpluses, which has lessened pressures to secure external financing. The increase in government finances is good news for ongoing economic diversification efforts, especially for public investment into renewable energy projects.”

Scott Livermore, ICAEW Economic Adviser, and Chief Economist and Managing Director, Oxford Economics Middle East, said: “Inflation in the energy market could benefit the GCC economies. This has meant that global investors looking for stability amid increased market volatility may seek out investment opportunities in the GCC. While there have been regular calls for the GCC economies to ditch the dollar peg over the years, it can be expected that the current environment will once again reignite the suggestion. The response from the leadership, especially in the current political landscape, will be telling of where they see the future.”

Unlike many emerging markets, GCC monetary authorities have been able to maintain very low interest rates. However, their currency pegs mean they will likely mirror US Fed hikes set to start in March, which ICAEW expects to total 175 basis points this year. Tighter monetary policy will have a limited near-term impact on the GCC economy, given the supportive energy and fiscal backdrop. However, higher borrowing costs are expected to be felt in 2023.

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