2020 was painful, but the region is recovering relatively well

Sharp recession in 2020

The pandemic caused the worst global recession since the second world war, with an estimated -3.3% real contraction, nearly twice as bad as in 2009. Our region saw even sharper contractions, ranging from -3.7% (Qatar) to -8.9% (Kuwait). This was partly because of sharp cuts in oil production, as OPEC+ implemented the deepest production cuts in history when lockdowns caused demand to drop sharply (oil cuts in Bahrain and Oman were partially offset by higher gas production). However, even the non-oil sectors in oil-producing countries contracted by considerably more than the global average.

The non-oil contractions were especially severe due to the various lockdown measures across our region, and the exposure of certain sectors particularly vulnerable to the impact on movement and consumption. A detailed analysis of two of these vulnerable sectors—travel and tourism and real estate—follows. Another vulnerable sector is retail and wholesale trade, which saw contractions ranging from -7.2% in Bahrain to -13.1% in the UAE. Manufacturing, which is a vital focus of diversification in the region, was also hit by the decline in global demand, with the sector seeing contractions as large as -33% in Kuwait. In addition some states, such as Oman, were forced to intervene and implement austerity measures in response to weaker oil revenue, worsening the recession across some sectors.

By contrast, oil-importing countries in the region fared better, particularly Egypt which even achieved a small growth of 1.5%. However, this was still its slowest growth in 30 years and below its population growth rate of 2.0%.

Signs of recovery despite a third COVID-19 wave

The region saw a renewed wave of COVID-19 this spring, which resulted in record rates of both cases and deaths. This happened even in those states—such as the UAE, Bahrain and Qatar—that have been world-leaders in vaccine rollouts.

Even with the new wave, which required temporary reimpositions of travel and movement restrictions, there were signs of solid recoveries underway. Saudi Arabia is the first to publish its Q1 GDP, which showed a very strong 4.9% q/q seasonally adjusted rebound in non-oil GDP, driven by private consumption (6.6%) and sectors such as non-oil manufacturing (13.6%) and transport and communications (8.5%).

A broader picture is visible from leading indicators. The purchasing managers indices in the GCC have all remained in expansion (above 50 points) this year and are higher than they were at the start of 2020.

The recovery is visible in a host of other indicators such as point of sales data, showing a recovery in consumption. Google mobility data, which has become a familiar new indicator globally, also points to the recovery. In Saudi Arabia, this data shows that since late May people have been making more frequent visits to retail locations than before the pandemic. The trends suggest that most countries will also reach that threshold within a few months, except perhaps those that are most dependent on tourism, like Bahrain.

The recovery may be slower than the global average

Global recovery is shaping up to be even stronger than anticipated. The IMF sees world GDP rebounding by 5.8% this year, the most in nearly half a century, meaning that it should reach pre-Covid output levels by the autumn.

The IMF forecasts solid recoveries in the region, although at a slower pace than the global average. The IMF forecasts imply aggregate growth of 2.5% in 2021 across 11 countries in our region, not enough to fully offset their -3.2% contraction in 2020. This calculation excludes Libya, which is a special case because its peace process has restarted oil production which should result in GDP more than doubling this year. The region is not expected to return to pre-Covid levels of output until about mid-2022 and some states, such as Iraq and the UAE, won’t get there until 2023.

The slower regional growth is partly because OPEC+ is only tapering its cuts gradually and so oil sector growth is seen as lagging the non-oil rebound, which the IMF puts at 3.1% regionally. However, since the IMF forecasts were published in April, oil demand has been beating expectations, causing a surge in prices, which is great news fiscally for Middle Eastern oil exporters. It also means that OPEC+ might speed up its tapering to meet demand, which is now expected to return to pre-Covid levels next year. Higher oil revenue usually translates into stronger non-oil growth, and so that too may well exceed the IMF’s expectations.