How the Gulf region will witness a vigorous recovery in 2021/22

After a traumatic year for the Gulf Cooperation Council nations which saw the oil price tumble from around $60 per barrel at the end of 2019 to $20 and hotel occupancy fall from 80 per cent to 23 per cent as travel restrictions and lockdowns took effect in the battle against Covid-19, the outlook for 2021 is dramatically improved. However, it will not be until 2022 that life returns to something like normality.

The recent recovery of the crude oil price to the pre-pandemic level of $60-65 per barrel is a huge relief for all the Gulf states and will contribute materially to restoring budget balances by 2023 or 2024. Huge fiscal and monetary stimulus programmes administered in the US, the Euro area, the UK and Japan over the past year will sharply increase spending in these economies as social restrictions are lifted during the second half of 2021. The prospective spending surge in advanced economies points to a further rise in the oil price later this year.

Similarly, the widespread and rapid roll-out of several anti-Covid-19 vaccines together with the accumulation of pent-up, unspent money balances in the developed economies point to a vigorous recovery in travel, tourism and the hospitality sector in the GCC during the second half of 2021.

These sectors are especially important for the UAE, Saudi Arabia and Oman, and will be boosted by Expo 2020 to be held in Dubai from October 2021 to March 2022 and by the FIFA World Cup to be hosted in Qatar in November and December 2022.

After a year of steep economic declines across the region in 2020, economists polled by Bloomberg expect real GDP in all the Gulf states to return to positive growth rates in 2021, ranging from 3.1 per cent growth in Bahrain to 1.7 per cent in Oman (see table).

The turn-around will be powered both by a revival in revenues from hydrocarbons as well as by the re-opening of the travel, hospitality and commercial sectors. However, fiscal balances in all the GCC states are expected to continue deeply in the red as governments slowly reduce their support to key sectors on the expenditure side while oil revenues recover slowly – in line with the gradual increase in oil production — to pre-pandemic levels over the year. According to these forecasts, Kuwait and Oman will still be experiencing double-digit budget deficits of 15.6 per cent and 11.7 per cent of GDP in 2021.

In contrast to the weak, sub-par recoveries experienced after the Global Financial Crisis in 2008-09, the vastly different nature and scale of the economic stimulus deployed to deal with the pandemic in 2020 means that the prospects of a vigorous recovery in 2021 and 2022 are far more secure. Even so, it will probably take another 18-24 months before broad measures of income and output such as GDP in the GCC economies recover to their pre-crisis peaks.

John Greenwood is the chief economist at Invesco