Middle East beats world economy but must diversify away from oil, says ICAEW

The ICAEW report Economic Insight: Middle East is produced by Cebr (The Centre for Economics and Business Research), ICAEW's partner and forecaster. Commissioned by ICAEW, the report provides its 138,000 members with a current snapshot of the region's economic performance.

The report undertakes a quarterly review of the Middle East focussing on the Gulf Cooperation Council (GCC) member countries (United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), plus Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to GCC+5).

The report shows that countries in the Gulf Co-operation Council (GCC) are set to record robust growth of 5.6% in 2012. Although this is down from 7.4% last year it is still significantly higher than some emerging Asian economies. However, the reported progress is mostly driven by continued high oil prices, government investment in infrastructure and expenditure on public services including public sector salary hikes that have boosted consumer spending.

The conclusion reached is that oil prices must stay at elevated levels in order to adequately fund government commitments.

The Economic Insight:

Middle East report also stresses that Middle Eastern economies must diversify beyond petrochemicals to weather any future shocks to oil revenues. UAE is held as one of the region's leading the way by becoming a major financial, logistics and business hub, and Qatar has grown its non-oil sector faster than the hydrocarbon sector. However, the Report concludes that the process of diversification remains a challenge for most countries. At a macro level, it predicts GDP growth will slow further in 2013 but continue to outperform the rest of the world.

Doug McWilliams, Chief Executive of Cebr said: "Global growth is weak at the moment, so it is impressive that Middle East regional growth remains strong, even if it has slowed slightly. However, the fact that growth rests primarily on oil revenues should be a concern. Ferocious infrastructure investment programmes and large rises in public spending have boosted the figures, whilst pay increases of up to 60% for the public sector have naturally driven consumer spending power.But this can only be sustainable if oil prices and demand remain high.

"Global growth trends are likely to remain flat and governments in the region cannot continuously increase government spending at the same rate. Therefore it is likely that longer-term growth trends in the region will not rise much above 4% overall. Unless the dynamism of the private sector can be unleashed."

Peter Beynon, ICAEW Regional Director, Middle East, said: "Given that some parts of the world have actually shrunk over 2012, growth of over 5% is great news for the region. Dubai is leading the way by investing in jobs, education and skills and becoming a global business centre but more needs to be done if the GCC countries are going to become knowledge and skills led instead of purely relying on hydrocarbons. Economic diversification will take a long time to achieve, which is why it is important that governments and business intensify their efforts. "