Economic Outlook for the Gulf Cooperation Council in 2014: A Goldilocks Moment?

The World Bank’s latest Quarterly Economic Brief for the MENA region warns that short term prospects for many countries in the region are poor.  For reasons related to ongoing political turmoil, these countries face high fiscal and current account deficits and are not undertaking structural reforms that could make things better in the medium run.  On the other hand, one part of the region, the hydrocarbon-rich members of the Gulf Cooperation Council (GCC), faces a much rosier short term economic outlook.  This is of some consolation because the GCC economies account for almost half the region’s GDP and have a significant impact on some neighboring economies (including Egypt, Jordan and Yemen) through financial transfers related to remittances, tourism, foreign investment and aid.

With some variation among them, the six GCC countries have business cycles that tend to be driven by four external global factors:

• oil prices: oil features prominently in the GDP, exports and government revenues of five GCC countries while gas is similarly important to Qatar
• global trade: this is of special importance for the UAE for which non-oil exports (including re-exports) accounted for two thirds of total exports in 2013
• interest rates: GCC currencies are fixed to the dollar (with the Kuwaiti dinar being fixed to a dollar-heavy basket) and capital flows are unrestricted; so global rates quickly affect local rates
• global demand: rising global demand translates into a buoyant market for hydrocarbons as well as petrochemicals and related GCC exports; for some GCC countries like the UAE and Oman, this bodes well for the tourism sector also

How are these four factors trending?  The World Bank has just released its bi-annual forecasts (see here) of global economic prospects which provide a view on how key global variables are likely to evolve through 2016.  For 2014:

• Oil prices are forecast to stay roughly constant at around $103.5 per barrel, compared to $104 in 2013
• Global trade is expected to grow by 4.6% in 2014, much above the 3.1% achieved in 2013
• Key global interest rates are expected to remain low and unchanged; for example, 6 month US dollar rates are expected to remain at 0.4% in 2014
• Global demand is expected to pick up as high income OECD countries recover from an extended period of weakness; for example, the US is expected to grow at 2.8% (up from 1.8%) and the Eurozone at 1.1% (up from -0.4%).

These forecasts suggest that the GCC economies are about to enter a Goldilocks moment as far as the external context is concerned.  The key external drivers of the GCC economies are clearly set at levels that are not too hot, not too cold, but just right.  After growing at around 4% in 2013, as a group the GCC is likely to grow at closer to 5% in 2014.

Of course,  the above forecasts are surrounded by uncertainty.  For example, oil prices are subject to unpredictable geopolitical developments.  And some analysts warn of turmoil in emerging markets as the US Fed further tapers its quantitative easing stance over the coming months.  Regarding global demand, while the US and Eurozone economies are expected to do much better, there is some concern that global growth will be compromised by weakness in large emerging economies such as China and India that have become important trade partners of the GCC in recent decades. 

A domestic aspect may also be relevant.  Some banks and government related entities in the GCC (especially in the UAE) have not yet fully emerged from the difficulties brought on by the global financial crisis of 2008-09.  While leverage has been reduced and financial positions strengthened, some uncertainty exists regarding how smoothly the next round of debt-rescheduling exercises will proceed.