Complex Made Simple

This is why IMF slashed GCC growth forecasts

The International Monetary Fund (IMF) has downgraded 2017 growth forecasts for most GCC countries. The IMF revised its forecast for global growth for the first time in five years when its World Economic Outlook released last week.

The fund now expects the UAE’s economy to grow just 1.5 per cent this year (from a previous estimate of 2.5 per cent and down from an estimated 2.7 per cent growth in 2016).

This is suprising as the UAE is one of the world’s most open economies and should benefit from the improving global economic conditions that the fund has noted elsewhere.

GCC growth to dwindle

Saudi Arabia, Kuwait and Oman have also had their growth forecasts slashed this year, with only Qatar and Bahrain remaining relatively unscathed.

The reason why:

The report highlights lower oil sector growth assumptions for this year, following Opec’s November agreement to cut output. In the October 2016 Regional Economic Outlook for MENA, the IMF assumed oil sector growth of two per cent for the UAE in 2017.

If the IMF now expects a 4.6 per cent cut in oil output (in line with the Opec agreement), this explains the dramatic downgrade of headline growth for 2017. It appears that the IMF is also not expecting much by way of non-oil growth to compensate.

And when it comes to oil production, while the larger GCC countries have reduced crude production in Q1 2017 relative to Q4 2016, it seems unlikely that the decline will be sustained for the full year.

Global economy to accelerate

The IMF expects global growth to pick up from 3.1 per cent in 2016 to 3.5 per cent in 2017, compared with its previous forecast of 3.4 per cent for 2017.

However, the IMF warned that a number of risks could upset the global recovery such as trade protectionism, geopolitics, rising debt and tighter-than-expected monetary policy.

IMF’s World Economic Outlook report said: “A number of factors are expected to drive up global growth. First, fiscal policy is expected to become more supportive of growth in 2017. The government response to the global financial crisis of 2008-09 and European sovereign debt crisis in 2011-12 was to implement more ‘austere’ fiscal policy which dragged on growth right up to 2015.”

“However, the IMF estimates that fiscal policy became mildly supportive of growth in 2016. The lagged effects of this change in stance and broadly neutral fiscal policy this year are likely to contribute to higher growth in 2017.”

China supports development

China is providing considerable stimulus through public investment in infrastructure and real estate that reflects in the global economic growth.

The IMF report expects monetary policy in a number of economies to remain highly accommodating. The European Central Bank continues with negative interest rates and quantitative easing, which is pushing credit growth higher. And the Bank of Japan has introduced a policy to target ten-year yields of zero.

The report said: “Higher commodity prices are expected to contribute to global growth. The IMF expects oil prices to rise from an average of $45 per barrel in 2016 to $56 per barrel in 2017. This will support global growth as higher revenue leads to a recovery in income and spending in commodity-exporting countries and as investment in the energy sector recovers, particularly in the US.”

The inventory cycle is likely to contribute to growth in 2017. In 2016, as growth proved slower than expected in a number of large economies, companies in the US and Europe pulled back on investment and drew on inventories to meet demand, which led to a drag of around 0.4 per cent on GDP growth.

However, since mid-2016, companies have started rebuilding inventories leading to higher investment, which is expected to continue in 2017 and should be an important contributor to growth in both the US and Europe.

Finally, consumer and business sentiment are also likely to be important contributors to higher global growth, particularly in the US Forward looking indicators of business and consumer confidence have picked up globally since the middle of 2016.

Despite the positive prognosis, the IMF also cautions against a number of risks that could upset growth.

“Growth may be picking up in 2017, but the recovery could easily be short lived with a return to the slow global growth rates of the recent past not a distant possibility,” said the report.