Economic outlook for H2 'extremely positive'

The economic outlook for the rest of 2008 remains "extremely positive" for the six Gulf countries, whose nominal GDP is forecast to rise more than 27 per cent this year, Cairo-based investment bank EFG-Hermes said in a research note.

At the same time, inflation is expected to stabilise at a high rate as global food and commodity price increases start to slow down.

Although the second half started with a sharp correction in global oil prices, the fundamentals "remain highly supportive", it said. Brent crude prices slid by more than $20 per barrel to a month's low of $121.9 on July 29 from an all-time peak of $145 on July 3.

The International Energy Agency now forecasts that global oil demand will grow by 1.03 million barrels per day in 2008, down from its forecast at the beginning of the year of 2.11 million bpd. Oil prices have weakened on the back of the US dollar. Investors, who have been turning to commodities as a hedge against dollar weakness, unwound positions over the last two weeks of July.

"Despite this, the market consensus forecasts an oil price for brent of $129 in Q3 2008 and of $124 in Q4 2008, which would represent on year increases of 67.7 and 39.6 per cent, The average oil price in H2 2008 is forecast to be above the $109.4 average in H1 2008," said EFG-Hermes Senior Economist Monica Malik.

"We believe that a number of factors will continue to support the oil price for the remainder of the year, including continued strong demand from emerging Asia and reduced oil exports from Russia as more production is directed towards local refineries. Geopolitical developments in Nigeria and Iran could also potentially push up oil prices."

She forecast nominal GDP for all the GCC countries will surge by 27.3 per cent in 2008, up from 11.1 per cent in 2007. "This will be the GCC's second strongest nominal growth figure in over two decades, second only to 2005, when nominal GDP grew by 28 per cent from a much lower base. According to our estimates, the total size of the GCC economies in 2008 will cross the $1 trillion (Dh3.67trn) level for the first time to reach $1.03trn (up from $811 billion in 2007).

"We also forecast that real GDP growth will accelerate to 7.1 per cent in 2008 from 4.9 per cent in 2007. Both nominal and real GDP growth will also be boosted by the increase in oil production."

Non-oil GDP will remain robust at 6.9 per cent this year, EFG said, propped by strong private consumption and investment levels. However, this is lower than the average of 8.2 per cent logged over the previous five years. The drop is attributed to capacity constraints in all areas, including construction materials and labour, and the strong base effect.

Inflation levels will remain elevated given the high degree of economic activity in the region.

"Strong economic growth and the capacity constraints are central factors in the increase in prices. The expansionary economic environment is providing opportunities to the non-oil sector and is allowing wages to increase. Thus the GCC's current economic boom will not be derailed," Malik said.