High oil prices to power Gulf economies amid inflation risks

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BENGALURU — The Gulf Cooperation Council’s (GCC) economic growth will accelerate this year to a pace not seen in a decade, according to a Reuters poll of economists, who said high inflation and a slowing global economy were the biggest downside risks.

Crude prices, a major driver for Gulf economies, shot up after Russia invaded Ukraine in February and have remained elevated, giving a major boost to economies in the oil and gas-rich region.

An April 12-22 Reuters poll predicted growth overall in the six GCC economies would average 5.9% this year, which would be the fastest since 2012.

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“GCC economies have seen a relatively strong start to 2022. The hydrocarbons sectors have benefited from increased oil production so far this year, with crude oil production up 12% on Q1 2021 for the UAE and 19% over the same period for Saudi Arabia, said Khtija Haque, chief economist at Emirates NBD.

“Survey data for the first quarter of the year point to a solid expansion in non-oil sectors as well, with strong growth in business activity and new work in the UAE, Saudi Arabia, and Qatar.”

For Saudi Arabia, the region’s largest economy and world-leading exporter of crude oil, about 80% – or 17 of 22 contributors – upgraded their forecasts from the previous poll in January.

It was expected to grow 6.3% in 2022, up from the 5.7% forecast three months ago, before slowing to 3.2% growth next year. If that happens, 2022 growth would be the fastest since 2011, when oil averaged around $111 per barrel.

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The expected growth in Kuwait at 6.4%, and in the United Arab Emirates (UAE) at 5.6%, would be the fastest in around a decade. Qatar, Oman, and Bahrain are expected to grow around 4%, the fastest in several years .

However, when asked for the top two downside risks to GCC economies this year, 10 of 12 economists who answered an additional question said high inflation and a slowdown in the global economy.

Inflation in most of the GCC economies has risen in recent months against the backdrop of high food prices caused by the Russia-Ukraine war.

Although modest in comparison to many other countries, GCC inflation is expected to rise above 2% this year, with the highest median forecast for Qatar at 3.5%, and the lowest for Saudi Arabia at 2.5%.

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“In the face of higher commodity and global food prices, we have revised our 2022 inflation forecast for the GCC region to be about 3.5% from around 2.5%,” noted Ilker Domac, regional head of economics at Citi.

“Since GCC countries import 85% of their food, a sustained upward pressure on international food prices could pose a challenge for policymakers in the region.”

Also, uncertainty caused by the conflict in Ukraine could have an adverse impact on a global economy just emerging from the ravages of the pandemic.

The International Monetary Fund last week slashed its 2022 global growth forecast, citing war impact and describing inflation as a “clear and present danger.”

The GCC, highly dependent on revenues from energy exports, would face weaker demand from an economic slowdown – especially in China, one of the world’s biggest oil and gas importers.

“From the regional perspective, global growth concerns become a worry if they hit oil prices. Price pressures are certainly being felt though on the assumption inflation eases into 2023, the present trends should not derail efforts to keep non-oil sector recoveries on track, said Maya Senussi, senior economist at Oxford Economics.

(For other stories from the Reuters global long-term economic outlook polls package:)

(Reporting and polling by Md Manzer Hussain Editing by Hari Kishan, Jonathan Cable and Mark Potter)