Real and nominal GDP growth rates in the GCC are expected to slow down in 2012 because oil production and price are not expected to be higher than last year, according to a leading economist.

There may be a reduction in GCC oil output as Libyan supply comes back on stream and oil price may come under pressure due to an expected global slowdown, added Dr Gıyas Gökkent, group chief economist, National Bank of Abu Dhabi (NBAD) in the report GCC Economic Developments & Outlook 2012.

Upside risk to the oil price looks likely to hinge on geopolitical tension. The effect of the boost to output growth in Qatar from natural gas expansion will fade going forward as the country has a self-imposed moratorium on further development and current targets have been achieved. GCC real GDP growth is forecast to ease to 4 per cent in 2012.

Prospects remain clouded depending on the severity of the fall-out from the sovereign debt crisis in the Eurozone periphery. US Energy Information Administration projects oil prices at circa $100 per barrel provided the global economy does not slow down markedly.

Under this assumption, forecasts indicate that GCC nominal GDP will be $1.36 trillion in 2012, the report said. UAE’s nominal GDP is forecast to rise to $344 billion in 2012.

Non-oil growth

The pace of non-oil growth is expected to remain at a similar level to that in 2011, the report said.

Broadly, strength of non-oil activity across the GCC will be a function of credit growth. Qatar’s non-oil sector continues to grow the most rapidly in the GCC and annual loan growth of 23.8 per cent as of November 2011 reflects the breakneck speed of growth there.

On the other side of the range, annual credit growth in Kuwait was just 0.9 per cent as of November 2011 reflecting difficulties surrounding investment companies and the real estate sector as well as rules on personal lending. More rapid activity in Kuwait will have to await further implementation of the development plan.

The fiscal and current account balance outlooks remain positive across the region in the base case outlined above. GCC budgetary expenditures remain at record levels as these economies have pushed ahead with diversification and also responded to political turmoil in the Mena region with higher spending.

Fiscal breakeven oil price levels have risen to historically high levels as a result, with Bahrain at the high end of the spectrum at about $112 per barrel. A number of other GCC economies’ fiscal breakeven oil price is hovering in the $80 per barrel range.

Oman announced that the fiscal breakeven oil price for its 2012 budget would be $88 per barrel. These levels are more than 2-3 times the fiscal breakeven oil price in 2005-2007 and represent a source of vulnerability in case of a fall in energy prices.

Inflation broadly eased in 2011 reflecting the dissipation of price pressures and, to some degree, price controls. Commodity prices came off their highs earlier in the year. Food and Agriculture Organization’s food price index was down by 9.5 per cent in November 2011 compared to its peak in February.

The strength of the US dollar is disinflationary for the regional economies. The large recent salary increases to government sector employees in the region could lead to some demand pull pressure, but given muted credit growth and limited cost push pressure, inflation is not a concern at this time.

The consumer price index in the UAE was actually down 0.1 per cent in November 2011 from a year earlier. At the other end of the spectrum, the inflation rate in Saudi Arabia stood the highest in the GCC at 5.2 per cent year-on-year.

Large spending plans in a number of countries mean that some inflationary pressure may arise, but this is likely to be contained. Inflation in the GCC is expected to remain in low single digits in 2012, the report said.

The continued rise in the housing supply in UAE will continue to be a moderating factor in the consumer price index.

Risks to the outlook

The primary downside risk to the outlook is a sharp fall in the price of oil due to a greater than expected slowdown in the global economy driven by Eurozone turmoil. Geopolitical tension is another factor that could affect the outlook. This typically leads to a higher oil price which may offset, or even dominate negative spillovers, the report said. – TradeArabia News Service