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Middle East Economy Watch

March 2022

Recovery builds, despite Omicron and inflation concerns

The last few months in the GCC has been a case of snakes and ladders economically. On the positive side, oil production rose strongly as OPEC+ tapered cuts and prices reached their highest since 2014.

Meanwhile, the significant parts of the non-oil sector recovered from pandemic woes, as tourists began to return (see the Chart of the Quarter on page 4), businesses reopened and confidence recovered. Leading indicators such as purchasing managers indices registered multi-year highs and GDP data for Q3 showed broad recoveries, including Saudi Arabia’s economy surpassing its pre-pandemic high.

Then comes the negative. Covid had seemed defeated in the GCC as 2021 neared its close, with caseloads close to record lows. However, Omicron blasted through the region despite high vaccination rates, prudent social distancing and masking policies. Although this led to new records in daily caseloads, a corner may have been turned in early February and mortality rates thankfully remain far below previous waves.

Maybe this is the final serious wave of Covid in the Gulf and globally. That’s a difficult prediction to make, but whether or not it proves to be accurate, there are economic legacies from the pandemic that will persist a while longer. One of these may be inflation and we take a deep dive into this topic in this issue.

The GCC isn’t yet seeing the high levels experienced by countries such as the US and inflation is far below the region’s previous inflationary period in 2007-8. There are significant differences between that episode and this one. That wave was driven by global food and local housing costs. This wave is mainly coming from fuel prices and supply chain issues, while housing costs are actually in decline in most of the region owing to population declines. 

Looking ahead, economists expect inflation to ease in the GCC later this year, although there is a risk to this. Meanwhile, oil output is expected to rise significantly this year as OPEC+ continues to taper production cuts in response to growing demand as the global economy continues to recover from the pandemic. High oil prices will support confidence and government spending, providing added impetus to the non-oil recovery, seeing most of the Gulf states returning to close to 2019 levels of activity by year-end. There are geopolitical risks that complicate this outlook, for example, lifting of sanctions on Iran could take some of the steam off oil prices, nevertheless, the Ukraine conflict is likely to cause the oil prices to remain elevated in the short term.

All data and analysis for this report was concluded prior to the conflict in Ukraine (Feb 2022).

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Hani Ashkar

Hani Ashkar

Middle East Senior Partner, PwC Middle East

Stephen Anderson

Stephen Anderson

Clients and Markets Leader, PwC Middle East

Richard Boxshall

Richard Boxshall

Middle East Chief Economist, PwC Middle East

Tel: +971 4 304 3100

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