Muscat – The GCC economy is projected to rebound strongly with growth of 8.1% in 2027 as energy trade routes normalise, travel demand recovers and business confidence improves, according to a new research report.

The forecast follows an expected economic contraction of 2.4% in 2026, reflecting the impact of the Middle East conflict on energy exports, tourism and investor sentiment.

The latest Economic Insight: Middle East Q2 2026 report, published by ICAEW in partnership with Oxford Economics, was released as the United States and Iran signed a formal preliminary peace agreement on Thursday, broadly in line with the report’s baseline scenario. The report assumes that a final ceasefire agreement between the US and Iran will be reached by the end of July 2026 and that normal operations through the Strait of Hormuz will resume by the end of the year.

According to the report, the GCC’s economic contraction this year reflects severe disruption to energy production and trade flows. GCC oil-sector output is forecast to decline by 14.5% in 2026 – the sharpest fall in several decades – before rebounding by 23.5% in 2027 as production recovers from a significantly reduced base.

Saudi Arabia and Oman are expected to be the least affected GCC economies this year, with both countries forecast to maintain positive growth. Saudi Arabia and the UAE have been able to redirect part of their exports through alternative pipeline routes, helping to mitigate the impact compared with other regional producers.

Non-oil activity in Saudi Arabia and the UAE has also shown resilience. Purchasing Managers’ Index (PMI) surveys for May indicated the strongest output growth in three months, supported by improving domestic demand. Overall, however, GCC non-energy sectors are forecast to contract by 1.1% in 2026 before returning to growth in 2027 and beyond.

Tourism and travel face prolonged adjustment

The report noted that the GCC’s travel and tourism sectors have been among the hardest hit by the conflict. Inbound visitor arrivals are projected to decline by around 30% in 2026, equivalent to tens of millions fewer visitors and tens of billions of dollars in lost tourism spending across the region.

Recovery in the sector is expected to lag behind that of the energy industry, given travel demand’s sensitivity to accessibility and consumer confidence. Nevertheless, the report highlighted that the GCC’s well-developed tourism infrastructure, continued investment in capacity expansion and targeted tourism strategies provide a strong platform for recovery once conditions stabilise.

Despite short-term challenges, medium-term prospects for regional tourism remain positive.

Fiscal resilience supports recovery

The ICAEW-Oxford Economics report expects GCC governments to increase spending this year while maintaining commitments to strategic sectors such as financial services, technology and healthcare.

Most Gulf sovereigns continue to benefit from relatively low debt levels, with funding risks remaining manageable. The report said there was no evidence of lasting damage to the region’s strong sovereign credit profiles and expected Gulf governments and government-related entities to return to international debt markets once market conditions improve.

Inflationary pressures are also expected to remain contained. GCC inflation is forecast to average 2.6% in 2026, with food prices accounting for most of the upward pressure. The report expects these pressures to be largely temporary, with average inflation easing to 2.1% in 2027 as supply-side disruptions fade.

Commenting on the outlook, Hanadi Khalife, Regional Director at ICAEW, said, “The scale of disruption this year has been significant, and the economic data reflects that clearly. However, the data also shows how the region has adapted. Governments have moved quickly to support economic activity, alternative trade routes have been activated, and domestic demand has remained more resilient than many expected. The recovery projected for 2027 is substantial, and the foundations for that recovery are already being laid.”

Azad Zangana, Head of GCC Macroeconomic Analysis at Oxford Economics, said, “The economic damage from the conflict is concentrated and measurable. Energy output has fallen sharply, tourism has been disrupted and investment activity has slowed. However, the recovery envisaged in our baseline scenario is rapid. An 8.1% expansion in GCC GDP in 2027 and a 23.5% rebound in oil-sector output point to a region that is well positioned to recover quickly as trade routes reopen and travel demand returns.”