High global energy prices to boost GCC economies
The economies of the six-member Gulf Cooperation Council (GCC), have been experiencing an upturn since the second quarter of 2021, owing in part to a healthy recovery in international oil and gas prices during the same period.
A further fillip has been provided by a spike in international energy prices since the escalation in the conflict between Russia and Ukraine, KPMG, a multinational professional services network, and one of the reputed accounting organizations in the world, said.
In its report entitled Global Economic Outlook 2022, KPMG said that although international energy prices are unlikely to remain at current levels, given that the spike in part reflects uncertainty over oil and gas supplies owing to the war in Ukraine, they are likely to remain elevated in 2022.
The positive impulse provided by the GCC’s oil and gas sector – through both increased production and prices – will further support the ongoing economic recovery during the remainder of 2022 and into 2023.
Private sector confidence and activity, already supported by the easing of COVID-19-related restrictions, will further benefit from the high international energy prices as they strengthen GCC fiscal and balance of payments accounts– improvements in these indicators signal that GCC governments are better-equipped to offset any potential negative economic shocks.
On balance, current trends in the domestic and international economies will support robust economic growth in both the GCC’s oil and non-oil economies, with the pick-up in economic activity reducing unemployment rates.
Annual average inflation is expected to remain contained during 2022 and 2023. While COVID-19-related supply chain disruptions will remain a source of upward price pressures globally, both through production and transportation channels, inflation risks in the GCC will be cushioned by several factors.
First, GCC governments have thus far been successful with their supply chain management strategies. Second, the substantial use of foreign labour in the bloc helps to limit the potential for inflationary pressures that could arise from their economic recoveries narrowing the output gap. Third, the exchange rate peg against the US dollar, used by most members of the bloc, will help to contain import inflation, given the expected stability of the US dollar. Finally, the boost to GCC fiscal positions stemming from high international energy prices, in turn, provides GCC governments with the fiscal resources and thus ability to offset the impact of high international commodity prices on domestic inflation, for example, through price caps.
Non-GCC economies in the Middle East region are diverse in terms of their economic growth potential, but collectively many of these economies suffer from weak fiscal and balance of payments positions, volatile and weak economic growth rates, a low resilience to shocks and different degrees of political and/or social instability.
Base effects have flattered the economic performance of this group since around mid-2021 – many of these countries experienced significant economic contractions during the implementation of pandemic-related containment measures and, conversely, respectable headline growth rates have been recorded since their domestic economies and those of their main trading partners started to reopen, with the latter supporting external demand.