2018.. Turning Point for Middle East’s Economy?

Published February 27th, 2018 - 04:00 GMT
The Middle East’s GDP is expected to grow 2.9 percent this year, up from just 1.1 percent in 2017. (AFP/ File)
The Middle East’s GDP is expected to grow 2.9 percent this year, up from just 1.1 percent in 2017. (AFP/ File)

The Middle East’s GDP is expected to grow 2.9 per cent this year, up from 1.1 per cent in 2017. 

Economic activity is expected to pick up for oil exporters driven by two main factors, rising oil prices and increased government spending. Overall, the GCC’s GDP is expected to grow to 2.4 per cent this year, up from 0.1 per cent last year. And in 2019, as OPEC phases out its output cut, GDP growth is expected to accelerate further for oil exporters. 

The outlook is similarly positive for oil importers in. Lebanon’s GDP is expected to accelerate to 2.7 per cent in 2018 from an estimated 1.8 per cent in 2017, boosted by public infrastructure investment and trade and tourism recovery. While in Jordan, the kingdom’s GDP is expected to have marginal growth of 2.5 per cent this year, up from 2.3 per cent in 2017, mainly due to improving external demand and a positive outlook from its main trading partners.  

“Middle East economies are recovering from the difficult years of a low oil environment, various austerity measures and geopolitical risks. But more reforms are required to address the fundamental problems that have plagued so many countries of the region for so long, including reducing high unemployment rates, promoting fair competition and better regulation, investing in talent and strengthening women’s legal rights,” said Mohamed Bardastani ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics. 

Saudi Arabia is undergoing various fundamental economic and social changes. For the first time, Saudi citizens are paying five per cent VAT on goods and services, a sweeping anti-corruption crackdown generated more than $100 billion for the Saudi government, cinemas are expected to open as soon as March, and Saudi women will be permitted to drive from June. 

Real GDP is expected to rebound to two per cent growth in 2018, after contracting by 0.7 per cent last year, underpinned by expansionary fiscal policy and recovery in oil prices. The oil sector contracted by 3.0 per cent in 2017, primarily due to the OPEC deal that saw Saudi Arabia cut supply by about 0.5m barrels per day. The extension of the OPEC deal until the end of 2018 will cap oil sector growth, which is expected at 1.1 per cent this year. However, recovering oil prices and the opening of Jizan refinery this year will improve the overall outlook.  

The non-oil sector is expected to grow 2.6 per cent in 2018, thanks to various pro-growth government initiatives. The Saudi government announced the largest ever budgeted expenditure, including a 14 per cent year-on-year increase in capital expenditure. Budget spending will also be complemented by the release of state funds amounting to SAR50bn from the National Development Fund and up to SAR83 billion from the Public Investment Fund. 

“The outlook for Saudi Arabia’s economy looks positive thanks to reforms and rising oil prices. However, various challenges remain such as rising living costs for households and higher input costs for businesses. Sustainable and effective countermeasures would mitigate the adverse impacts,” said Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA). 

Household spending will be weighed down by the five per cent VAT and rising living costs as a result of higher electricity tariffs and gasoline prices introduced in January. Inflation is expected to reach four per cent this year, up from -0.3 per cent in 2017. For businesses, levies on expat labour and rising input costs pose additional challenges. While on the monetary policy side, the expected three rate hikes in the US this year will translate into higher interest rates in Saudi given the US dollar peg – this would raise the cost of borrowing for businesses and consumers alike.

By Jessica Combes

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