Q2 2025: The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: Outlook resilient to shifting trade policies
- GCC: Regional economies are well placed to withstand tariff headwinds
- Saudi Arabia: Non-oil strength supports growth, but fiscal risks rise
- UAE: Trade and investment deals reinforce positive outlook
GCC: Regional economies are well placed to withstand tariff headwinds
- Middle East GDP will grow 3.5% in 2025, with GCC economy expanding by 4.4%.
- Direct hit to GCC from US 10% tariff will be muted
- GCC is well placed to capture opportunities arising from global trade shifts
The outlook for the global economy looks weaker than anticipated at the time of the March report, with our 2025 forecast for world GDP growth cut by 0.3ppts, to 2.4%, lower than the 2.8% expansion registered last year and the lowest since 2020. The baseline assumes the temporarily lower US-China tariffs announced on May 12 will remain in place, while the rest of the world, including the Middle East, will continue to be subject to tariffs of around 10%. Despite tariff headwinds and heightened trade uncertainty, we continue to expect Middle East growth to be stronger this year than in 2024. Indeed, the faster-than-previously-expected rollback by OPEC+ countries of oil production cuts means we have revised up our expectations for Middle East 2025 GDP growth compared to three months ago. We now expect Middle East GDP will grow 3.5% this year (0.2pp more than previously), up from 1.5% in 2024.
We expect GDP growth in the GCC of 4.4% this year, 0.4ppt higher than previously and 0.9ppt above consensus. Two key themes have pulled the forecast in opposite directions in the last three months – OPEC+ production intentions and shifting tariff policies. OPEC+ members began to raise oil supply in April and have subsequently pledged to raise production faster than we’d anticipated three months ago as the group focuses on regaining market share. The group announced outsize output increases for May, June and July, pledging to bring back three times the supply it planned initially. This implies stronger growth in regional energy sectors than what we had projected three months ago.
Meanwhile, as of April 5, GCC countries face the universal 10% tariff on their goods imported into the US. For Bahrain and Oman, the tariffs supersede the terms of their free trade agreements with the US. We assess the direct impact of tariffs on GCC economies will be muted given the GCC's exports to the US amount to a mere 3% of its total exports, and energy exports are exempt. Still, we think trade-related uncertainty will weigh on near-term external demand and investment, acting as a headwind to near-term regional growth.
Our updated forecast for GCC now incorporates the three larger output hikes announced by OPEC+ for May, June and July, which we expect will contribute to oil-sector growth of 4.6% this year (up from 3.2% we forecast three months ago). For Saudi Arabia specifically, we now project average oil production of 9.7mn bpd for the year, up from our previous estimate of 9.2mn bpd. This revision raises our Saudi oil sector growth forecast to 5.2% in 2025, compared to the earlier estimate of 1.9%. The UAE will also benefit from an accelerated OPEC+ taper plans, supporting oil sector growth of 6.1% this year (up from 4.8% previously). We think growth in the GCC oil sectors will pick up more strongly in 2026 as countries continue to raise supply.
We see growth prospects for the GCC non-energy sectors remaining positive despite lowering the projected pace of expansion to 4.1% this year (down 0.3ppts relative to three months ago). High frequency data corroborate resilient growth momentum overall, particularly in Saudi Arabia, where we see the non-oil economy expanding north of 5% annually for the next few years, and the UAE, where non-oil growth will average around 4.5%. Recent surveys point to robust hiring to meet demand in both countries, which combined with high levels of project spending should continue to support high levels of activity. And with the timeframes of country development visions getting closer, governments are likely to accelerate efforts to meet targets.
A less globalised world will challenge the GCC's economic diversification efforts, but we think the region is well placed to capture opportunities arising from the inevitable shifts in global trade. Indeed, the regional visit of US President Trump in May underscores an enduring strategic partnership. Both Saudi Arabia and the UAE are well placed to leverage the announced technology and AI agreements in line with the region's diversification objectives. Enhanced access to Nvidia chips along with new infrastructure will accelerate AI adoption and foster innovation. A recent study classified both countries as 'AI rising contenders'.
Tourism will also remain a key engine of growth, following strong performance last year. Tourism figures for Q1 in Dubai show the number of international visitors rose by 3% y/y to 5.3mn, with hotel occupancy rate of 82%. We expect a 10.3% rise in tourist arrivals in the UAE this year, driving non-energy sector growth through real estate, hospitality, and infrastructure spillovers.
The current low oil price level has raised fiscal risks for the region. Aside from the UAE, commodity exports still contribute 60% of government revenue in Saudi Arabia and over 70% in the case of Oman, Qatar and Kuwait over 70% of budget revenue. Downward pressure from oil prices on revenue will strain regional budgets, forcing spending cuts or higher borrowing. Our baseline assumes governments maintain spending plans in the near-term, leading to wider deficits.
On a country level, we still project surpluses in Qatar and the UAE, but deficits elsewhere. In Saudi Arabia, we now forecast a budget deficit of 3.4% of GDP, wider than the 2.8% of GDP gap registered last year. Consequently, we expect higher borrowing levels, with the debt-to-GDP ratio edging above 30% in 2025, though debt levels will remain low by global standards.
Generally, investors continue to see the region as a bright spot in the global economy and foreign participation is growing in both bond and equity markets. The IPO market saw a record number of deals last year, totaling 53, raising over $13bn, with Saudi Arabia and the UAE seeing the highest activity as authorities seek to deepen capital markets and broaden diversification.
We have cut our aggregate GCC inflation projection for 2025 by 0.3ppts, to 2.0%. Inflation pressures appear weaker than expected following lower inflation readings across the region year-to-date. In Bahrain and Qatar, annual inflation is in negative territory, while it is hovering around 2% in Saudi Arabia. Within the region, our 2025 forecast is the highest for the UAE, at 2.5%, owing to ongoing upward pressures from housing prices. Housing rents are also a primary driver of inflation in Saudi Arabia, though pressures are now easing.
Despite low inflation in the region, domestic interest rates will stay high in the near-term given the currencies’ peg to the US dollar. We still expect the US Federal Reserve (and hence regional central banks) to cut rates aggressively beginning in December, which should support domestic consumption and investment next year.
Elsewhere in the Middle East, geopolitical uncertainty persists, clouding economic prospects. Iran engaged in nuclear talks with the US for the first time since 2018. The talks introduce potential upside risk for Iran’s economic outlook. However, we are not optimistic, and a collapse in negotiations could trigger more severe US sanctions. For now, we think Iran's economy will continue to be affected by US sanctions, persistent inflation, and domestic challenges, with our 2025 GDP growth forecast lowered by 0.9ppts, to 1.6%. In Lebanon, we’ve become more optimistic that the economy will return to expansion this year and have raised our 2025 GDP growth forecast by 0.6ppts to 1.4%. The election of Joseph Aoun as the new president in January and the formation of a new government after nearly three years under an interim administration have facilitated re-engagement with the IMF to secure and updated financial package, critical for the revival of the economy. For Syria, Trump's unexpected decision to lift US sanctions removes the key barrier to the country's recovery, which will prompt an upward adjustment to our baseline outlook.
Saudi Arabia: Non-oil strength supports growth, but fiscal risks rise
- Higher oil production lifts GDP growth forecast to 5.2%
- Strong domestic demand drives non-oil activities
- The widening fiscal deficit will be funded by higher debt
We expect overall GDP growth in Saudi Arabia to rise to 5.2% this year, up from 1.3% in 2024. We expect the 10% US tariff to have only a limited domestic economic impact. Energy exports – over 85% of Saudi exports to the US – are exempt, and the US accounted for just 8% of total Saudi exports in 2023.
Saudi Arabia’s economy expanded by 3.4% y/y in Q1, driven by a 4.9% rise in non-oil activities, underscoring solid domestic momentum. Government activities grew by 3.2% y/y, while oil activities contracted by 0.5% y/y, reflecting oil caps on oil production at the time. Saudi oil production eased to just below 9mn b/d in April owing to increased maintenance activity, but it is set to rise. We now forecast average production of 9.7mn b/d in 2025 (previously 9.2mn b/d), underpinning our 5.2% projection for oil GDP growth (1.9% previously).
The General Authority for Statistics (GaStat) also rebased national accounts to 2023, resulting in a 14.1% upward revision to 2023 GDP and a larger share for non-oil sectors. Key upward revisions include a 61% increase in construction and nearly 30% in trade and hospitality—sectors central to achieving Vision 2030 goals. A separate report from GaStat showed Saudi Arabia’s digital economy expanded to 15.6% of GDP in 2023. The increase reflected broad-based adoption of digital technologies across sectors and points to deepening integration that aligns with the ongoing growth momentum of the non-oil sector.
High-frequency indicators, such as the PMI, continue to point to strong domestic demand. New orders and business activity are both rising, driven by robust demand, which has also led to the fastest employment growth in 16 months. We expect the non-oil sector to expand by 5.3% this year, remaining the primary driver of growth this year, supported by government investment and a private sector expansion.
During his visit to Saudi Arabia in May, Trump secured a $600bn investment pledge (initially hinted in January), short of the $1trn he aimed for, but he came away with the largest arms deal in history valued at $142bn along with numerous energy and mineral agreements. We think Saudi commitment to delivering on domestic investment could restrict its ability to fulfil overseas investment pledge within the four-year timeframe. But the agreements could catalyse stronger FDI inflows. Indeed, the Saudi government targets 5.7% of GDP in FDI by 2030, requiring a significant increase after FDI declined for a third consecutive year in 2024, to $20.7bn (1.9% of GDP).
Meanwhile, the relatively low oil price heightens fiscal risks for Saudi Arabia, potentially necessitating increased borrowing, if spending remains high. Saudi Arabia posted a fiscal deficit of SAR58.7bn in Q1 2025—the largest in over three years and over half the full-year budgeted shortfall of SAR101bn. The deficit was driven by an 18% y/y drop in oil revenues, while non-oil revenues rose slightly by 2%. Despite weaker revenues, spending grew by 5%, led by increases in social benefits and wages. Given weak oil prices and reduced dividend from Saudi Aramco, we now expect the full-year deficit to widen to SAR140bn (3.4% of GDP). Although we expect higher borrowing levels, with the debt-to-GDP ratio edging above 30% in 2025, debt levels will remain low by global standards. S&P upgraded Saudi Arabia’s sovereign credit rating to A+ from A, citing governance improvements, Vision 2030-driven non-oil sector growth among key drivers, and the importance of a calibrated fiscal expansion.
Annual inflation has hovered around 2%, edging up to 2.3% in March-April. Food inflation rose above 2%, its highest since Q1 2023, while housing inflation eased below 7%, the lowest in over two years. We expect inflation to stay contained, averaging 2% this year, compared with 1.7% in 2024. We still expect the Fed’s first rate cut in December, followed by sharper easing in 2026. Given the riyal’s peg to the US dollar, this implies domestic interest rates will stay high in the near term but will ease in 2026, boosting domestic consumption and investment.
UAE: Recent investment news reinforces positive outlook
- GDP growth seen rising to 5.1% this year
- Oil production increases support GDP growth
- UAE is well positioned to advance its innovation agenda
We expect UAE’s GDP growth to pick up to 5.1% for 2025, from an estimated 3.8% last year, underpinned by a rebound in oil sector activity, in line with OPEC+ quota adjustments. A significant increase in supply is likely through 2027-2028 to capitalise on enhanced production capacity and maximise returns before a significant global transition away from fossil fuels. We predict oil production will average 3.8mn bpd by 2027, in line with the investment plans to increase capacity to 5mn bpd. This will provide a robust stream of revenue and enable the government to support overall GDP growth.
Non-oil GDP growth remains solid, with PMIs well above the neutral 50 level, indicating continued expansion, even as momentum shows signs of easing. The UAE is deepening international ties to support investment and economic diversification as it aims to conclude 27 Comprehensive Economic Partnership Agreements (CEPAs). These agreements are improving access to key markets and enhancing trade terms and foreign trade reached a milestone in 2024, surpassing 3trn dirhams for the first time. Abu Dhabi’s recent investment agreements with Japan-targeting finance, energy, technology, and urban development look set to foster collaboration. Meanwhile, we expect the most recent, and potentially most consequential, negotiations with the EU to further support foreign direct investment and trade flows. Against this backdrop, we forecast non-oil GDP growth at 4.7% for 2025, similar to the pace last year.
We expect the recently announced 10% US import duty to have only a small direct impact on the UAE. This is due to the relatively small share of UAE non-oil exports heading to the US, which has remained below 2% in recent years. Moreover, President Trump’s recent visit to the UAE signals a potential deepening of bilateral relations, marked by the UAE reaffirming a US$1.4tn investment pipeline over the next decade, the announcement of USD 200 billion in new agreements and the launch of the “US-UAE AI Acceleration” framework. This initiative underscores a commitment to enhanced cooperation, with implications for both foreign investment inflows and reciprocal gains from the UAE’s pledged investments in US firms. The emphasis on AI also reflects a strategic push toward knowledge transfer, positioning the UAE to advance its innovation agenda.
The UAE is also directing investment towards sectors key to its Industrial Development Strategy, including renewables, manufacturing, advanced technology, healthcare and food security, with several local lenders, such as the Emirates Development Bank (EDB) providing funding.
Travel and tourism are a well-established driver of UAE’s growth and they will continue to play a vital role. According to the latest WTTC data, international visitor spending is projected to inject AED 267.5 billion into the economy in 2025, accounting for nearly 13% of GDP. The sector’s expansion aligns with Emirate level strategy, where the D33 agenda aims to position Dubai as a leading global tourism hub, and reinforces the national strategy to diversify growth, enhancing economic resilience. Dubai welcomed 5.3mn international visitors in Q1, up 3% y/y. Beyond hospitality, other sectors, such as real estate and education, will also benefit from the growth in population, particularly in Dubai.
We expect inflation to average 2.5% in 2025. The tariff fallout will likely suppress inflation globally, but the weaker dollar (via the UAE's currency peg) could counteract this, raising import prices, particularly from non-dollar trade partners. For now, price pressures are contained on a national level, though housing and recreation costs remains a key contributor to inflation in Dubai. We do not see other categories driving volatility in the basket but expect persistent housing pressures to linger while more real estate projects launch within the next couple of years.