GCC’s economic growth set to slow to 3.6 percent Business conditions to remain solid

KUWAIT CITY, Jan 19: GCC economic growth is set to slow to 3.6% in 2013 from 5.4% in 2012 as the three-year surge in regional oil production comes to an end. However, on the ground, business conditions are expected to remain solid as governments maintain elevated levels of investment and social spending, which will ultimately support confidence and private sector activity. Geographically, Qatar and Oman are likely to be the region’s best performers. But project market activity will also help build or sustain growth momentum in Kuwait and Saudi Arabia.

Our base case forecast assumes that oil prices average $100 per barrel (pb) over the forecast horizon - a level that allows most GCC governments to finance higher spending without draining their financial reserves. GCC oil production is projected to fall by 1-2% per year over the next two years as Gulf OPEC producers move to reverse some of the big output increases seen since 2010.

But there are risks to this forecast. A major global economic downturn could see global oil market fundamentals loosen by more than expected in 2013, pushing oil prices below $100 pb for a prolonged period. This would put government fiscal balances under pressure and cause cuts in spending or delays in project execution, weakening economic growth. Over the medium-term, major economic reforms in areas such as the labor market, education, and competition policy are needed to enable the private sector to grow more independently of state support. Such reforms have taken a back seat of late as governments have prioritized measures to boost incomes and jobs.

Despite healthy rates of economic growth, GCC inflation remains low. Weighted consumer price inflation had fallen from 2.7% mid-year to 2.0% by October and is expected to have averaged 2.4% in 2012. The decline has been driven by a deceleration in food price inflation in some countries, soft figures for housing rents and the lagged impact of earlier US dollar strength on import prices. A slight pick-up in inflation to 3% is seen in 2013, as some of these factors go in to reverse while domestic economic growth remains strong. However, at these levels, inflation is unlikely to register as a major policy concern.

Fiscal and monetary policies will remain expansionary. Aggregate GCC government spending is seen rising by 6-8% per year over the next two years and by 2014, spending could be nearly 50% higher than in 2010. Lower oil production and prices will hit oil revenues, however, and the region’s budget surplus will more than halve from 12% of GDP in 2012 to 5% by 2014.

Finally, interest rates are expected to stay at recent record lows, in order to help manage exchange rate pegs against the US dollar. Bank lending is also likely to remain solid overall - and particularly in those countries where growth is strongest. Banking sector profitability should see an improvement after a provisioning-affected 2012 - so long as the global economy maintains its footing.

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