Middle East Economy Watch

June 2019

Oil rebound offers support for economies in the region

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Oil prices rebounded firmly in March-May 2019 as a result of strong compliance with production cuts by OPEC. The higher fiscal revenue and business confidence should underpin growth in much of the region, which seems to have been borne out by strong purchasing manager indices in the UAE and Saudi Arabia.

But oil is inevitably volatile, and as this report was going to publication in early June, the price was dropping back towards about $60/barrel, unwinding the gains of the previous three months. This was for a range of reasons including global growth concerns.

Already in April, the IMF had cut its forecast for global growth in 2019 to 3.3%, which would be the lowest rate since the financial crisis. Since then the breakdown of US-China trade talks and the growing likelihood of a “no deal Brexit” in the UK have added to the downside risks, which weighs on oil prices. At the same time, US oil production and inventory growth has continued to beat expectations. Nonetheless, the oil market could easily trend back up again in the second half of the year, depending in part on the outcome of the OPEC+ meeting in Vienna on June 25th. Irrespective of this, the non-oil economy will continue to exhibit positive trends in several countries.

Meanwhile, one area of concern is the onset of deflation in the GCC. The region as a whole recorded deflation in January to April, as prices declined in the three largest economies and only rose modestly elsewhere. This is the steepest price decline in decades, driven mainly by rents, but also affecting other sectors.

Deflation did ease in April, largely due to higher fuel prices, and may still prove to be a temporary quirk. However, there is a danger of deflation spreading to other sectors, as it has in Dubai, eroding corporate profits and harming growth.

This is not a foregone conclusion and a pause in interest rate rises in the US may give Gulf central banks a welcome opportunity to boost liquidity and mitigate deflationary trends.

Meanwhile, we continue to step back from the noise of the latest economic data to monitor more long-term trends that are relevant to the region. These include progress in integrating women in the workforce to unlock economic potential (see chart of the quarter).

In addition, in our economics blog series we looked at the shift in trade routes between Asia (particularly China) and Europe and Africa and their impact on the potentially disintermediated trade hubs in the region, above all Egypt and Dubai.

Contact us

Hani Ashkar

Middle East Senior Partner, PwC Middle East

Tel: +971 4 304 3100

Stephen Anderson

Clients and Markets Leader, PwC Middle East

Tel: +971 4 304 3100

Richard Boxshall

Middle East Senior Economist, PwC Middle East

Tel: +971 4 304 3100

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