Hints of recovery, despite Omicron

2021 ends with strong signs of growth

The GCC economies performed strongly in the second half of 2021 as oil production and prices rose and much of the non-oil sector rebounded from the pandemic. Among the four states that have published GDP data for Q3, Saudi Arabia and Dubai performed the most strongly, up by 7.0% y/y and 6.3%, respectively. However, only Saudi Arabia’s economy has recovered above its level in 2019, with the others still having to catch up, particularly Dubai, as its economy is more weighted towards sectors such as transportation and tourism that have been impacted by the pandemic.

Leading indicators in the final months of the year showed further signs of growth. Saudi Arabia’s flash Q4 GDP was up by 6.8% y/y. Qatar’s purchasing managers index (PMI) soared to a record 62.2 on average in Q4, far above previous records, and the UAE’s PMI was at a three-year high. This suggests that non-oil economic growth was even stronger in Q4 than in Q3. In addition, OPEC+ tapered its cuts by a further 1.2m b/d during the quarter, equivalent to a 3% increase in production for the GCC states (except Qatar, which did not participate in the cuts).

Q3-21 Real GDP growth (%)

_{Source: National statistical agencies}

Return to fiscal surpluses

The increase in oil prices is transforming government finances in the region. Saudi Arabia is budgeting for its first surplus in nine years in 2022. Other GCC states have budgeted small deficits, on conservative oil price assumptions, such as $55 for Qatar and $50 for Oman. But in early 2022 oil has moved above $90 for the first time since 2014 and many forecasters expect it to push further, well above the fiscal breakeven prices in most of the GCC. Gas import prices have also spiked in Asia and Europe, smashing previous records in December, equivalent to oil at nearly $300/barrel. Most gas traded by Gulf countries is on long-term contracts with fixed or oil-linked prices, so the main impact for the region is that this is boosting demand for oil in place of gas for electricity generation.

Saudi Arabia’s budget has stuck within a spending envelope first laid out two years ago, which would be equivalent to a -6% cut from its estimated 2021 outturn. However, high oil prices may motivate a procyclical shift towards greater spend. Some countries have already made that explicit, with Qatar budgeting for a 5% increase over its 2021 budget. Oman’s spending plan is similar to its estimated 2021 outturn, but it has subsequently implemented some procyclical policies, such as postponing its plans for electricity subsidy reduction. Although it is important that Gulf governments do not get carried away with oil prices that may only be high for a limited period of time, there could be scope for increased spending that would further support the post-Covid economic recovery.

Omicron hitch

In late 2021, it seemed as if Covid-19 had been defeated in the Gulf, with daily cases dropping to just a few hundred in November. Unfortunately, Omicron proved otherwise, with cases soaring to about 25,000 by the end of January, triple the previous record. Although daily deaths were still climbing in early February, given the usual lag behind cases, they were averaging about 15 a day, less than a fifth of the peaks during previous waves. Although there has been a reintroduction of some restrictions on travel and social interactions, these have been far less stringent than in the past and so are not expected to significantly impact economic activity.