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Non-oil sector to drive GCC growth to offset oil output cut impact

Extended output cuts implies a delayed recovery in GCC energy sectors

Published: Wed 26 Jun 2024, 5:48 PM

By
Issac John

A view of the Marina Beach in Dubai. — AFP file

The GCC’s non-oil sector will remain the key growth driver for the region in 2024 and beyond while the overall GDP is expected to slow to 2.2 per cent as the oil output is projected to shrink due to Opec+ group’s extension of voluntary output cuts through Q3, according to the Institute of Chartered Accountants in England and Wales (ICAEW).

The Economic Insight report commissioned by ICAEW and compiled by Oxford Economics, said the extended output cuts imply a delayed recovery in GCC energy sectors as oil output will shrink by 2.6 per cent this year instead of the 1.3 per cent expansion forecasted three months ago.

The GCC growth forecast has been revised down to 2.2 per cent from 2.7 per cent three months ago, though non-energy sectors remain resilient, including in Bahrain and Qatar.

However, the World Bank has revised its economic outlook for the GCC region, reflecting a brighter future but a slightly slower present.

In its Spring 2024 Gulf Economic Update, the bank predicts regional growth to reach 4.7 per cent in 2025, a significant upward adjustment from the previous projection of 3.8 per cent.

It expects the UAE’s economy to grow 3.9 per cent in 2024 on higher oil production. The World Bank expects oil output growth to reach 5.8 percent in 2024. Meanwhile, non-oil output will remain robust, expanding at 3.2 percent. Hence, the UAE has shown strong performance in the tourism, real estate, construction, transportation and manufacturing sectors.

The World Bank said this year’s growth is expected to fall slightly short of earlier estimates. While the initial forecast predicted a 3.6 per cent expansion, the revised figure is 2.8 per cent. Despite this adjustment, the Washington-based institution maintains a positive outlook. The anticipated rebound in oil output, coupled with the continued strength of the non-oil economy, is fueling optimism for the region’s future.

The ICAEW report said Saudi Arabia, which is cutting production to the greatest extent, will see oil activities contract by 5.0 per cent this year, down from a predicted growth of 0.7 per cent. However, as voluntary production cuts are reversed in 2025, energy sectors will begin making positive contributions to GCC growth.

The accounting body said Saudi Arabia, Bahrain and Kuwait would see budget deficits this year and in 2025 as the current oil price level is below the fiscal breakeven point.

However, the overall GCC budget position is projected to remain somewhat in surplus this year, driven by robust financial standings and favourable credit ratings that will allow continued access to funding from capital markets and initial public offerings.

The report projected that Qatar’s economy will expand by 2.2 per cent in 2024 and will rise to 2.9 per cent in 2025. Given that Qatar is not involved in the Opec+ production quotas, its gas sector is a priority, with authorities doubling down on the North Field gas expansion project, promising a positive medium-term impact. Bahrain continues to diversify its economy and reduce its reliance on oil revenues. The kingdom’s non-oil sector grew by 3.4 per cent in 2023, accounting for nearly 84 per cent of its GDP.

“Bahrain has also seen significant investment growth following the launch of the Golden Licence initiative in April 2023, which requires a minimum investment of $50 million and the creation of at least 500 jobs,” said Scott Livermore, ICAEW economic adviser and chief economist and managing director at Oxford Economics Middle East.

He said Bahrain’s financial services sector contributed nearly 18 per cent of GDP, surpassing oil, which contributed 16 per cent.

Saudi Arabia’s non-oil sector is set to receive a boost from investments into critical sectors supporting giga-projects, including construction, manufacturing, and transportation. The Arab world’s biggest economy is expected to witness strong momentum in the hospitality sector, as tourism is expected to remain key to the country’s growth agenda.

Tourism is also a strategic sector in other GCC countries and will remain a key growth driver. Tourism activity has rebounded strongly, with record visitor numbers across the GCC in 2023, extending into this year.

The GCC inflation forecast for 2024 has been lowered by 0.3 percentage points to 2.2 per cent in 2024, with a further slowdown to 2.1 per cent expected next year. Excluding housing rents in some countries, inflationary pressures remain contained, with rates below 2.0 per cent