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December 7, 2022

GCC: A stellar 2022 performance, headwinds in 2023

Guest blogger Khatija Haque of Emirates NBD discusses the outlook for the oil-producing economies
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In-house blogger
Guest blogger
Khatija Haque
Chief Economist and Head of Research
Emirates NBD
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

The Gulf Cooperation Council (GCC) countries enjoyed a strong 2022 on several fronts. We expect economic growth in the region to come in at around 7% on a nominal GDP-weighted basis, the fastest in over a decade. This has largely been driven by double-digit growth in oil production across the region as the pandemic-related production cuts were fully unwound.

However, non-oil sectors have performed well too, and we expect average non-oil GDP to grow 4.4% this year. That’s similar to the pace achieved across the GCC in 2021, even as global growth slowed this year. Domestic demand has continued to rebound from the pandemic and the recovery in global travel and tourism has also supported non-oil sectors, particularly in the UAE. Expo 2020 contributed to strong growth in the UAE’s tourism and hospitality sectors in Q1 2022, and the reopening of long-haul markets saw visitor numbers rebound sharply from last year (though they remained about 15% below 2019 levels through September). The FIFA World Cup in Doha is expected to support demand in Q4 2022, even as the global economy starts to slow.

GCC nations’ budget performance has also improved significantly on the back of higher oil production and prices, as well as the broader economic recovery in the region. We estimate the average GCC budget surplus will reach almost 8% of GDP this year following seven years of deficits. While spending has increased slightly this year, governments have so far been relatively prudent with their oil windfall, using budget surpluses to build up reserves, pay down debt and invest for the future. The GCC countries have also provided financial support to other MENA countries that have faced current account shocks this year on the back of rising energy and food prices.  

The outlook for the GCC in 2023 remains constructive. That said, economic growth will slow sharply as the 16% increase in oil and gas GDP that we saw this year is unlikely to be repeated, and further production cuts from OPEC+ pose a downside risk. Non-oil GDP is also expected to slow somewhat next year, but is likely to remain relatively robust as governments continue to invest in strategic sectors and projects to diversify their economies.

Our baseline forecast is for oil prices to remain above USD 100 per barrel next year. As the next chart shows, that’s good enough for most government budgets in the GCC to maintain spending even as private investment slows.

There are headwinds to growth in the coming months. The tighter monetary policy that we’ve seen in 2022 will continue to weigh on global economic growth in 2023 as central banks focus on bringing inflation down. Even with oil prices expected to remain relatively high, the GCC is not immune from such a global slowdown, particularly given the region’s position as a global trade and logistics hub.  Higher borrowing costs may deter private-sector investment in the region, and a strong US dollar will also erode competitiveness, making the region a more expensive destination for both foreign investors and tourists.

Overall, we expect average GDP growth in the region to slow to 3.5% in 2023, half our estimated growth rate for this year. In a world where several developed economies are forecast to be in recession, however, the GCC looks likely to remain an outperformer in the global context.

Originally published 28 November 2022.

You can follow Khatija Haque for more analysis here.

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