Key facts
- Most Gulf economies will contract more sharply this year than previously expected due to Hormuz Strait disruptions.
- Kuwait and Qatar's economies are now forecast to slump 8.1% this year.
- Bahrain's economy is expected to shrink 5.1%, and the UAE's by 0.5%.
- Saudi Arabia and Oman are projected to remain expansionary economies.
- Economists anticipate a rebound in 2027, contingent on easing tensions and normalized shipping.
Most Gulf economies are expected to face a more severe downturn this year than previously anticipated, according to a Reuters poll of economists. The primary driver for these revised forecasts is the ongoing disruption and closure of the Strait of Hormuz, a critical chokepoint for the region's oil and gas exports, exacerbated by tensions between the U.S. and Iran.
Economists have abandoned earlier assumptions of a quick normalization of shipping and energy exports. The disruptions have led to oil prices increasing by nearly 20% this month to around $85 a barrel. While higher crude prices benefit revenues, they are not fully compensating for lost export volumes, increased freight costs, and diminished investor confidence.
Kuwait and Qatar have seen the sharpest forecast downgrades, with both economies now predicted to contract by 8.1% this year, a significant increase from the 4.4% and 6.0% contractions forecast in April. Bahrain's economy is expected to shrink by 5.1%, revised from a previous prediction of 2.9%, while the UAE's economy is now forecast to contract by 0.5%, down from a prior expectation of stagnation.
Saudi Arabia and Oman are the only GCC economies still projected to experience growth. Saudi Arabia benefits from its East-West pipeline to the Red Sea, and Oman's export terminal is located outside the Strait of Hormuz, limiting their exposure to the shipping disruptions. Saudi Arabia's economic growth estimate was cut to 1.4% from 2.6%, while Oman's was raised to 3.1% from 2.2%. Estimates for both countries showed wide variations.
Experts caution that Gulf GDP forecasts should be viewed with care, emphasizing that the ability to physically move hydrocarbons, goods, and people through the Strait of Hormuz is a critical factor. A prolonged disruption could lead to more persistent damage, while a short-lived disruption might result in a sharp near-term hit followed by a rebound.
Despite the current downturn, forecasts for next year suggest a swift recovery. Kuwait is expected to lead with 10.1% growth, followed by Qatar at 7.8%, Saudi Arabia at 6.0%, the UAE at 5.8%, Bahrain at 4.5%, and Oman at 2.8%. These optimistic projections assume a gradual return to normal shipping through the Strait of Hormuz within six to 12 months.
The ongoing crisis complicates efforts by governments in Riyadh, Abu Dhabi, and Doha to diversify their economies away from oil. Sectors like tourism, logistics, finance, technology, and real estate, which are intended to buffer against oil price volatility, are also exposed to conflict-related disruptions, including airspace restrictions, reduced travel, delayed shipments, and a higher regional risk premium.
Inflation forecasts remain relatively contained across the GCC. Median expectations place inflation in Saudi Arabia at 2.1%, the UAE at 2.9%, Kuwait at 2.7%, Qatar at 3.2%, Oman at 2.5%, and Bahrain at 1.9%. This containment is attributed to dollar pegs, subsidies, price controls, and substantial fiscal buffers, which have mitigated the impact of elevated freight and insurance costs.