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Slow start to 2018, but still cautiously positive outlook: 2018 Q2 summary


• Growth in the Middle Eastern  economies has flatlined in 2017 at 1.0%, the slowest in 8 years, but recovering oil prices, easing of fiscal consolidation measures, relative improvements in the security conditions and steady progress of reform will push growth to 2.4% in 2018.
• GDP growth in the UAE is expected to accelerate to 2.6% this year, after a seven-year low of 1.5% growth in 2017, underpinned by rising public spending, higher oil prices and regional economic recovery. The introduction of 5% VAT will lift inflation to 4.0% this year and activity in the real estate market remains weak.
• The downturn in commodity prices has put Kuwait’s economy under strain, along with other oil-producing countries. Growth is expected to rebound to 2.4% this year, after a contraction of 2.9% in 2017, supported by higher oil prices and a stronger projects market. The discord between the government and parliament will continue to present challenges to overall project spending, including in the oil and gas sector.

Regional overview
Middle Eastern economies are recovering from a difficult year in 2017, when growth slowed to an 8-year low at only 1.0%. The economic slowdown was caused by low oil prices, OPEC+ production cuts of around 1.7m b/d in their efforts to rebalance the global oil markets, sustained political challenges and various fiscal austerity measures (especially in the GCC). We remain cautiously optimistic about economic growth in the Middle Eastern economies this year, despite a relatively slow start in Q1 2018 (judged by the PMIs of major ME economies, including the UAE and Saudi) and a heightened geopolitical environment, as we see growth picking up to 2.4% in 2018. The outlooks and risk profiles for Middle Eastern countries vary, but overall, we maintain a positive outlook for the year.

The collapse of oil prices from an average of US$99 p/b in 2014 to an average of US$43 p/b in 2016 has led to a sharp economic downturn in oil exporting countries, applying additional pressure on undiversified government finances and weakening fiscal and external positions. We estimate that economic growth in the GCC last year slowed to 0.1%, the weakest since 2009, while Iraq’s economy contracted by 0.3%. However, economic prospects are more promising this year, underpinned by rising oil prices (our oil price forecast rose from US$69 to US$71 for 2018), higher government spending in the GCC and steady progress of economic reform.

We expect economic growth in the GCC and Iraq to recover by 2.3% and 2.5% respectively in 2018, but we lowered our forecast for Iran from 4.1% previously to 2.3% due to the nuclear deal fallout, which will weigh negatively on overall output and the country’s oil exports as the US reimposes economic sanctions.

Oil prices hit their highest level since November 2014 at US$80 p/b following President Trump’s decision to pull out of the nuclear deal. The fate of the deal is still uncertain as the European countries alongside China and Russia work to salvage it. It is unclear how successful their efforts will be given the exposure of European companies to secondary US sanctions if they continue dealing with Iran. A complete collapse of the deal would exacerbate an already heightened geopolitical tension in the region, weighing negatively on growth, business confidence and investment sentiment. In the GCC, the Qatar blockade seems the new normal, with no signs of reversal so far, and though the short-term economic impacts have been limited, the continuation of blockade could undermine long-term investment in the region.

(icaew)


 
 
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