Despite the prospect of further turmoil in global financial markets, GCC economies will see another year of solid growth and large budget surpluses in 2012, says a new report.
Real GDP growth is expected to touch 4.6 per cent, compared to an oil output-boosted 7.9 per cent in 2011, said the GCC Outlook report from National Bank of Kuwait.
Oil markets are likely to remain firm, while further increases in government spending will support investment and consumer spending, it said.
Meanwhile, the risks from an external financial shock from Europe or elsewhere seem manageable. GCC banks are liquid and well-capitalized, it said,
Direct exposure to risky Eurozone government debt is negligible, and financial and economic excesses are much smaller now than in 2008, the report said.
Qatar will once again be the region’s strongest performer, although its growth is likely to decelerate as gas production levels off.
Regional crude oil production leapt by 11 per cent in 2011 as Opec countries – led by Saudi Arabia and the GCC – moved quickly to replace 1.5 mbpd of lost Libyan output. Even with the gradual return of Libyan production and the risk of an economic downturn, oil market fundamentals are expected to remain tight through 2012 and worldwide inventory levels could decline again.
As such, GCC countries may avoid large cuts in oil production, leaving average output more or less unchanged this year. Oil prices are assumed to average $110 per barrel (pb) after $108 in 2011, it said.
GCC government spending could record its lowest rate of increase in several years in 2012, at 6 per cent. However, this more reflects the super-strong 17 per cent increase of 2011 – driven by the $27 billion of exceptional spending in Saudi Arabia – than any deliberate belt tightening. The Arab protest movement of 2011 will help ensure that governments remain focused on their medium-term development goals and that fiscal policy remains supportive of growth. Private sector activity – still held back by deleveraging and sluggish credit growth in some countries – should continue to recover. Real non-oil GDP is seen growing 5.6 per cent.
In spite of decent growth and big increases in government spending, inflation remained generally in check through 2011, averaging an estimated 3.2 per cent, up fractionally from 2010. Key to this was the deceleration in food price inflation in 2H 2011, led by softer global commodity prices. But ‘core’ inflation has also remained low, at around 2 per cent. Another year of solid economic growth and an improvement in monetary conditions across the region could presage a slight pick-up in inflation in 2012 to 3.8 per cent. Given regional currency pegs, the 6 per cent strengthening of the US dollar trade-weighted index in 2H 2011 will help cap ‘imported’ inflation through 2012, the report said.
With oil production staying high and prices remaining above the $100 pb mark, the GCC will see a further year of large fiscal and current account surpluses, possibly in the range of 10-20 per cent of GDP for the region as a whole, it said.
This will once again mark the region out in a year of austerity and deficits elsewhere in the world. Indeed, one major challenge for the region will be to decide how to invest these surplus revenues safely given the uncertain global economic outlook.