The Arabian Gulf economies are forecast to accelerate and expand 2.4 per cent in 2018, but households will face inflation because of the introduction of value-added tax (VAT) and continued austerity measures, according to a new report.
Gulf economies, which will expand around 1.1 per cent this year owing to a slowdown in the oil sector, will grow further in 2019 to 4 per cent, according a report released by the Institute of Chartered Accountants in England and Wales (ICAEW) and produced by Oxford Economics.
The energy-dependent Gulf economies are facing headwinds as oil prices remain low and Opec members in the region – which accounts for about a third of the world's proven crude reserves – comply with a global oil production cut that has been extended to the end of next March. Opec is now considering extending the oil deal beyond March.
"The extension of product cuts [beyond March 2018] will actually delay what we are forecasting as a recovery," said Michael Armstrong, ICAEW regional director for the Middle East, Africa and South Asia.
Non-oil growth in countries such as the UAE is expected to pick up as the government boosts spending in the run-up to Expo 2020. The UAE's economy, which is expected to expand by 1.7 per cent this year, is forecast to rebound in 2018, growing 3.3 per cent and further accelerating by 3.6 per cent in 2019.
"We are seeing growth both across the region and particularly in the UAE, we see significant part of the growth coming from infrastructure investments," said Mr Armstrong.
The report's forecasts for next year are almost in line with projections from other economic bodies.
The IMF projects that overall growth in the UAE this year will reach 1.3 per cent, compared with 3 per cent in 2016. The IMF's growth forecast for 2018 is 3.4 per cent.
The IMF and Bank of America Merrill Lynch also concur that medium term non-oil growth in the UAE will reach 3 per cent or higher, thanks to investments related to Expo 2020.
Saudi Arabia, Opec's biggest oil producer, on the other hand, is likely to suffer more from the weaker oil prices and the limits on its crude production.
The report is forecasting the growth in the kingdom will slow to 0.2 per cent this year and rebound to 3 per cent next year.
"In Saudi Arabia, the oil price is more acute because of the fact that you have got less diversification and the non-oil sector is not as vibrant as it is in the UAE," said Mr Armstrong.
On the other hand, Saudi Arabia slipped back into recession as the economy contracted in the first two quarters of this year owing to lower oil revenues and government austerity measures taking a toll on the economy.
Its GDP shrank 1 per cent year on year in the second quarter after contracting 0.5 per cent in the first three months of this year, official government figures showed on Saturday.
Austerity measures across the Arabian Gulf as well as the introduction of taxes this year will dent household incomes.
The introduction of a GCC-wide 5 per cent VAT next year will increase the cost of living in affected countries by 2.5 per cent and 0.5 per cent in 2019-22, the report said.
Moreover, a weaker dollar, to which GCC currencies are pegged to except in Kuwait, and the removal of energy subsidies as part of reforms aimed at shoring up government revenue will also push inflation rates higher. GCC-level Inflation at the GCC level will accelerate to 4.7 per cent next year from 1.2 per cent this year.
The report forecast that consumer spending growth would slow ing down to 2.5 per cent in 2018 and 2019 from an average of 4.2 per cent per year between 2010 and 2016.