Gulf Cooperation Council (GCC) economies showed resilience in navigating global uncertainties while advancing economic diversification in non-oil sectors, the World Bank said on Thursday, projecting economic growth across the Council to increase in the medium-term to 3.2% in 2025 and 4.5% next year.
The World Bank's growth forecast for this year is lower than its previous forecast of 4.2% in December, while the forecast for next year has been raised from 4.2% to 4.5%.
According to the latest edition of the Gulf Economic Update (GEU), regional growth was 1.7% in 2024, an improvement from 0.3% in 2023.
In its report titled “Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC,” the World Bank said that while global energy markets continue to play a significant role across the GCC, sustained diversification efforts are fostering a more balanced and resilient growth model.
“The resilience of GCC countries in navigating global uncertainties while advancing economic diversification underscores their strong commitment to long-term prosperity,” said Safaa El Tayeb El-Kogali, Division Director for the GCC countries at the World Bank.
“Strategic fiscal policies, targeted investments, and a strong focus on innovation, entrepreneurship, and job creation for youth are essential to sustaining growth and stability,” she added.
According to the report, the non-hydrocarbon sector remained resilient, expanding by 3.7%, largely fueled by private consumption, investment, and structural reforms across the GCC.
It said in 2024, GCC economies faced a contraction of the oil sector of 3.0% linked to OPEC+ production cuts, which were aimed at the stabilization of global energy prices.
Overall regional growth nonetheless strengthened to 1.8%, driven by a resilient expansion of the non-hydrocarbon sector by 3.9%.
This expansion, the Bank said, has been driven by Bahrain, Oman, Qatar, Saudi Arabia, and the UAE.
On aggregate, 50% of the non-hydrocarbon expansion can be attributed to private consumption, with the other half being driven by government consumption and fixed investment.
In Saudi Arabia, the report said Vision 2030 continues to drive diversification; the share of non-oil sectors in GDP grew from 45.4% to 54.8% since its adoption.
It added that non-oil sector growth is forecast to remain at 4.97% in the medium term.
Meanwhile, the bank said global trade uncertainty can be a risk for diversification efforts across the GCC. Its impact could materialize through the supply of externally sourced materials and the demand for exported hydrocarbons.
On the global demand side, trade uncertainty and tariffs can induce a global economic slowdown, hampering global demand for hydrocarbons, which remain among the main export goods for the GCC. Again, impacts on Chinese business and consumer dynamism could have particularly pronounced effects for the GCC due to their strong trade linkages.
At the same time, this uncertainty can also be an opportunity to accelerate structural reforms in the GCC.
In the report, the Bank said headline inflation across the GCC remains low, despite interest rate cuts in 2024.
GCC headline inflation rates averaged 2.0% in 2024, showing a further decline from an average of 2.2% in 2023.
In a change to previous years, 2024 saw interest rate cuts across the GCC countries, in line with decisions by the US Federal Reserve, given the exchange rate pegs.
Therefore, the Bank report discusses the effectiveness of fiscal policy in ensuring macroeconomic stabilization and encouraging growth.
The topic is particularly relevant as oil price fluctuations strain budget balances in several countries across the region.
Some GCC countries, the Bank said, are projected to experience increasing fiscal deficits in 2025, emphasizing the need for understanding the effectiveness of fiscal policy.
The report finds that government spending in the GCC region has effectively stabilized economies, especially during recessionary episodes.
The findings show that a 1-unit increase in fiscal spending can boost non-hydrocarbon output by 0.1-0.45 units in the region.
The report also finds a marginal impact of government investment on non-hydrocarbon output – a 0.07% change in potential output for a one-time percentage point increase in investment.
The report also showcases Oman’s fiscal consolidation journey as a noteworthy example of effective economic reform and responsible fiscal management.
It highlights the challenges Oman has faced due to oil dependency, the measures it implemented to restore fiscal balance, and the encouraging outcomes of these reforms.
Under its Medium-Term Fiscal Plan 2020-2024, Oman introduced wide-ranging reforms to diversify revenue sources, improve expenditure efficiency, and prudently managing hydrocarbon windfalls.
Oman’s reforms have yielded tangible results since 2022, with a marked improvement in its fiscal position and a significant reduction in public debt.
