As we enter the final quarter of 2021, it is a good time to look back on how the region’s economies have performed so far compared with our expectations at the start of the year and also to recalibrate our outlook for next year.
The UAE has yet to release official gross domestic product statistics for the first and second quarters of this year, but the PMI survey data suggests that the non-oil sectors have continued their gradual recovery following last year’s Covid-related contraction. Companies have generally reported increased activity on a monthly basis and domestic demand appears to be strengthening.
Although global travel restrictions have continued to weigh down the tourism sector, the outlook for the fourth quarter is brighter here as well.
Emirates NBD expects the UAE’s non-oil sector to expand in line with our forecast of 3.5 per cent at the start of this year.
However, the decision by Opec+ to increase oil production by 400,000 barrels per day every month from August means that the oil sector contraction we had pencilled in at the start of this year for the UAE will be less severe.
Overall, the country's headline GDP growth is likely to be in the region of 2 per cent in 2021, following a 6.1 per cent contraction last year.
In Saudi Arabia, data for the first half of 2021 shows that the non-oil sectors have recovered faster than we had expected. With consumer spending growing by about 10 per cent in the first seven months of this year (compared with the same period in 2020) and private sector credit growth remaining robust, we think the non-oil sectors in the kingdom will grow by 5 per cent in 2021, faster than we had forecast at the start of this year.
On the oil and gas front, we expect Saudi Arabia’s crude production will rise to 10 million bpd by the end of this year, from 9.4m bpd at the end of July. For the year as a whole, we think oil and gas GDP will only contract by 1 per cent in 2021, much less than we had previously anticipated.
As a result, headline GDP growth in the kingdom is likely to reach 2.5 per cent this year from -4.1 per cent in 2020 and almost double the growth rate we had forecast in the first quarter of 2021.
The outlook for next year will also be affected by the Opec+ agreement to unwind the Covid-related production cuts and to increase members’ baseline production levels from which future adjustments will be calculated.
While we believe the market can absorb an extra 400,000bpd of oil every month through the end of this year, if this pace of increased output is maintained through 2022, all of the pandemic related cuts would be unwound by the end of the third quarter.
It would also mean double-digit growth in crude oil production for major GCC oil exporters and thus sharply higher headline GDP growth in 2022.
However, the oil market balance would return to surplus by the second half of next year in this scenario. This might exert downward pressure on oil prices, based on current demand projections. The question then is whether Opec+ will continue to increase production at the current rate if it means accepting a lower oil price.
Budget deficits in the region have narrowed this year but break-even oil prices for the GCC countries is likely to remain above our expectation of $65 per barrel in 2022 based on our forecasts for government spending next year, except the UAE where we estimate a budget breakeven oil price of $61 per barrel next year.
As a result, we expect Opec+ to curb production growth next year to keep the market closer to balance and support oil prices in the $60-70 per barrel range.
For the UAE, we think the oil and gas sector will grow by 6 per cent in 2022, while non-oil sector growth should accelerate to 4 per cent. This should see headline GDP growth rise to 4.6 per cent next year.
In Saudi Arabia, we expect oil and gas GDP to grow 8.5 per cent in 2022, while non-oil growth is also forecast at 4 per cent.
Kuwait, Qatar, Oman and Bahrain will similarly benefit from higher oil production next year.
For the GCC as a whole, we expect real GDP growth will accelerate to 5.1 per cent in 2022 from an estimated 2.3 per cent this year. If this is achieved, that would be the fastest regional growth in almost a decade.
Khatija Haque is the chief economist and head of research at Emirates NBD
