Market analysis: IMF too pessimistic on Gulf outlook

The IMF downgrade for the UAE growth outlook comes as a surprise since the Emirates is a beneficiary of improving global economic conditions. Above, Jumeirah Towers in Abu Dhabi. David Tanecek / CTK vShow more

The IMF’s latest World Economic Outlook report published last week is encouraging and consistent with a steady and gradual improvement in the world economy. Global GDP growth is expected to expand by 3.5 per cent this year and 3.6 per cent in 2018. By 2022, the IMF looks for growth of 3.8 per cent driven mostly by 5 per cent growth in EM economies.

In revising up its forecasts the fund cited stronger activity, expectations of more robust global demand, reduced deflationary pressures and optimistic financial markets as positive developments. Fiscal policy at the global level is projected to be broadly neutral in 2017 and 2018, but the IMF assumes a “sizeable fiscal stimulus” in the US next year, coming from reductions in personal and corporate income tax burdens. The IMF assumes that monetary policy will be “moderately less accommodative” than previously because of stronger demand and inflation pressure.

However, of particular regional interest was that the IMF sharply downgraded 2017 growth forecasts for most GCC countries. 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 a particular surprise as the UAE is one of the world’s most open economies and should be a beneficiary of the improving global economic conditions that the fund has noted elsewhere. Saudi Arabia, Kuwait and Oman have also had their growth forecasts slashed this year, with only Qatar and Bahrain remaining relatively unscathed.

The reason appears to be 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 2 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 would explain the dramatic downgrade of headline growth for 2017, although it appears that the IMF is also not expecting much by way of non-oil growth to compensate.

From this latter point of view the fund’s view looks overly pessimistic as the Emirates NBD Purchasing Manager Indexes for the region suggest that non-oil sector activity has been quite firm so far in 2017, reaching the highest levels in one-and-a-half years in both the UAE and Saudi Arabia.

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

Even if the Opec agreement is rolled over at next month’s meeting, which looks probable, Opec officials have indicated that it might only be for three months rather than another six months. And then there is the issue of compliance, which would still have to be maintained for oil output to fall by as much as the fund’s forecasts imply. In fact even in the first quarter of this year, during which the UAE cut oil production by 4.8 per cent quarter-on-quarter, UAE oil output was still up 3.6 per cent on the same period a year ago, meaning that the hydrocarbon sector was still a positive contributor to growth. So it remains far from clear whether the economy even started the year as weak as the IMF thinks, and if it did, whether this weakness will be sustained over the rest of the year.

Another forecast that illustrates how far out the IMF can be is its recent record of predicting the UK economy. Last week the IMF upgraded its 2017 UK GDP growth forecast substantially for the second time in three months, taking its projected growth rate from 1.5 per cent in January to 2 per cent, stronger than any other major economy, as it acknowledged that its Brexit assessment had been too gloomy. Only back in October last year the IMF had said that the UK would grow by only 1.1 per cent in 2017, and before the Brexit referendum Christine Lagarde had famously said that that the outcome of a decision to leave the EU ranged from “pretty bad to very, very bad”. As things stand now, however, with a UK general election now called for June 8 and with the UK economy moving along nicely, it could be argued that the IMF’s 2 per cent forecast is still too low, and is a reminder that the IMF’s forecasts are not always wholly reliable.

Tim Fox is chief economist and head of research at Emirates NBD.

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