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Relaxation of restrictions, higher oil price trigger economic rebound

13 Jun 2021

Business confidence in the GCC countries, including Oman, has strengthened in recent months as the COVID-19 restrictions eased, vaccination rollouts progressed and oil price reached pre-pandemic levels, according to a new report released on Sunday.

The latest Economic Insights report for the Middle East, compiled by Oxford Economics, has found that the relaxation of COVID-19 restrictions are triggering a strong rebound in the region’s economies. However, while there are positive signs for recovery in the second half of this year and beyond, the economies still remain far from their pre-pandemic levels.

The strong Purchasing Managers’ Index (PMI) readings, the report said, indicate growth accelerating in the coming months, boosted by rapid vaccine rollouts that will help domestic activity move back towards normality.

The overall GCC GDP will grow by 2.1 per cent this year, after a 5 per cent contraction seen in 2020, the report commissioned by ICAEW said. 

‘The region’s economies are in a good position to capitalise on the surge of travel demand when the rest of the world opens up.’

After plunging into a recession triggered by the twin-shock of the COVID-19 pandemic and lower oil prices last year, Oman is expected to see a rebound in economic growth this year. The Ministry of Economy earlier this year predicted the sultanate’s real GDP to grow by 2.3 per cent in 2021.

The World Bank recently said Oman’s economy is expected to grow by 2.5 per cent in 2021 and bounce back strongly next year with 6.5 per cent growth, the fastest growth forecast among the GCC countries.

The International Monetary Fund (IMF) too recently said that Oman’s real GDP will grow by 1.8 per cent this year and 7.4 per cent in 2022, the highest growth forecast for any GCC country.

Scott Livermore, ICAEW economic advisor and chief Economist at Oxford Economics, said, “The rise in the oil price has boosted revenue prospects for GCC producers, which derive 40-90 per cent of total fiscal income from oil.  Higher oil revenue gives governments more scope to support post-pandemic recoveries without undermining efforts aimed at improving medium-term fiscal sustainability.” According to the Oxford Economics and ICAEW report, the wider Middle East region’s GDP will grow by 2.4 per cent this year, a similar rate to the region’s average growth trajectory in the last decade, and an improvement from the 4.4 per cent it shrank by in 2020.

Although global COVID-19 cases are still high and new outbreaks are being reported daily, the pandemic looks to be under control in China, Europe and the US. And with the summer tourist season approaching, oil demand is increasing, the report said.

‘This, alongside ongoing supply reductions from OPEC+ producers, has stabilised the oil price at above US$65 per barrel, and US$64.4 for Brent crude in 2021, up from US$62.’

However, given the continuously fragile demand outlook and plentiful scope for stronger supply growth, the upside for oil prices will remain limited through 2022 and 2023 and the Oxford Economics report forecasts Brent to average US$61 per barrel during that period.

Michael Armstrong, FCA and ICAEW’s regional director for the Middle East, Africa and South Asia, said, “The outlook for most Middle Eastern economies looks positive this quarter, but keeping coronavirus levels low will be essential to ensure economies can return to growth.  Governments across the region must keep developing sectors and industries that foster innovation, and continue implementing reforms to diversify economies and accelerate them into the post-COVID era.”

 

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