Download economic insight MIDDLE EAST Quarterly briefing Q1 2013

economic Insight
Middle East
Quarterly briefing Q1 2013
Middle East economy to slow in 2013
but to continue outpacing the global
economy
Welcome to the eighth issue of ICAEW’s Economic
Insight: Middle East, the quarterly economic forecast
prepared directly for the finance profession. Produced
by Cebr, ICAEW’s partner, and acknowledged experts
in global economic forecasting, it provides a unique
perspective on the prospects for the Middle East region
as a whole and for individual economies against the
international economic background. We focus on the
Middle East as being the Gulf Cooperation Council
(GCC) member countries (United Arab Emirates (UAE),
Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), plus
Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to
GCC+5)1.
In 2013, the Middle East is set to slow from the robust
expansion experienced over the last two years but
growth will still be stronger than the world economy
as a whole. The global economic outlook has stabilised
and there are signs that, by the second half of 2013,
growth could start to accelerate again, particularly
in emerging markets. In the Middle East the impact
of the rapid expansion in public spending continues
to be felt.
The dramatic increase in government spending over
the last two years exaggerated the pace of growth
across the GCC countries in particular, so the rate
of change in expansion is likely to ease in 2013. The
Middle East is expected to record growth of 3.9% in
2013, but across the GCC growth in GDP is expected to
be 4.8%. Although this is weaker than the 6% growth
recorded in the GCC in 2012, it is enough to be the
envy of most Western economies. In this issue we also
look at the longer-term issue of population; illustrating
that rapid population growth in the region is fuelling
economic expansion but also creating challenges.
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Global economy stabilises as US fiscal
cliff is avoided and eurozone crisis is
becalmed – for now
Through early 2013 the global economic outlook
has stabilised. Equity markets have rallied in the
early stages of 2013 and global oil prices have risen
above $110 a barrel as global economic uncertainty
diminished. Crucially, in the US the ‘fiscal cliff’ was
avoided as a last-minute deal was reached to avoid
automatic spending cuts and tax rises. Meanwhile in
the eurozone, the European Central Bank’s promise
to buy government bonds seems to have calmed
market fears for now, with government bond yields
falling back. However, there are still clear concerns in
both cases. First, the US will still need to endure fiscal
consolidation which will act as a drag on growth, and
deciding the optimal make-up of spending cuts and tax
rises will be one of re-elected President Obama’s key
challenges. Second, a long-run, sustainable solution
to the eurozone crisis has not yet been delivered.
Unemployment in Spain remains extraordinarily high
at 26% while in Germany the unemployment rate is
at a post-reunification low below 7%. It remains to
be seen whether the single currency area can deliver
sustainable economic growth across the eurozone area
given these enormous internal divergences.
Figure 1 illustrates that the downward momentum
across the global economy has started to ease. The
annual growth in world trade had been declining
through mid-2012 but the latest data show global
growth having reached a floor. With aggressive
monetary policy being used across the US, Japan, the
eurozone and the UK and the new Chinese regime
working to arrest declining growth in the world’s
second largest economy, the global economy looks
to be set for a steady expansion in 2013, with the
potential for growth to pick up later in the year and
into 2014. In the Middle East, the evidence suggests
trade is continuing to blossom; figure 1 shows how
imports to the Middle East and Africa continued to
grow at a double-digit rate through the final quarter of
2012. Can this growth performance be sustained into
the medium term?
Figure 1: World trade volume, quarterly annual
percentage change in trade volumes
Middle East population growing far
faster than the West
One of the remarkable features about the Middle
East region has been the huge growth in population,
creating conditions for a growing labour force but also
no shortage of political pressures. The population of
Middle Eastern countries grew between 1990 and 2010
by 52%, outpacing average population growth across
the world over the same period, which was 29%. While
Iraq, Jordan, Oman and Saudi Arabia have all seen their
populations increase by more than 50%, growth has
been even more dramatic in Bahrain, Qatar and the
UAE where the population has more than doubled.
The population of the UAE is now three times as large
as it was in 1990. By comparison, European population
growth over the same period was just 2.5%. The
primary consequence of this remarkable growth has
been a change in the demographic make-up of the
region; proportionally, the Middle East now has the
world’s largest youth population, with 60% under
the age of 30.
Middle East population to have more
than doubled from 1990 level by 2030
Moreover, the pace of population growth in the
Middle East is expected to continue to remain higher
than elsewhere in the world, as seen in figure 2. The
Middle East’s population will have more than doubled
from 1990 levels by 2030 and is expected to continue
growing considerably after then. This is in stark
contrast to advanced economies, many of which are
already experiencing shrinking populations, making for
major demographic and economic pressures. The most
notable example of this is Japan, while many European
economies will face a declining working population in
the coming years too. Overall, the population of the
Middle East 2 is expected to expand by 33% to 319m in
2030, up from 241m in 2010. In contrast, Europe will
see its total population expand by just 0.4% (or 3m)
over the same timeframe.
Figure 2: Population growth projections: the
Middle East compared with the world and Europe,
1990–2030, index 1990 level = 100
Million
225
%
200
20
15
175
10
150
5
0
125
-5
100
-10
-15
Middle East (GCC+5)
-20
World
Europe
Source: United Nations Population Division
Iraq and Egypt to experience strongest
population growth
World Trade
Middle East & emerging Africa import volumes
Source: CPB, Cebr analysis
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Much of this will be driven by strong population growth
in Iraq and Egypt as seen in figure 3, which compares
the population levels in 2010 and 2030. By 2030, Iraq is
expected to see its population increase by 75% from its
2010 level, so its population will reach 55m. Kuwait, too,
is expected to see strong growth of 47% to surpass
the 4m mark. Although Egypt already has the largest
population in the region, it is expected to continue
to grow substantially, reaching 106m in 2030, after
growth of 31%. Iranian population growth is expected
to be more restrained, increasing 14% from its current
level to surpass 84m in 2030. Lebanon too will see
slower growth – just 11% by 2030 to reach 4.7m
people. This is still strong in comparison with Europe,
where the population is expected to start declining
in the 2030s. The realisation of these estimates is
dependent upon immigration, as well as changes in
family size. Immigration has been a major factor in
population growth to date, particularly in the GCC.
If immigration policy continues to move to discourage
this, actual growth in these countries may be lower
and slower than current expectations.
Figure 3: Population across the Middle East from
2010 to 2030
Million
%
120
80
70
100
60
80
50
40
60
30
40
20
20
10
Unemployment across the Middle East
remains a key challenge – particularly in
non-GCC economies
The region’s unemployment rate has been
comparatively high for the last decade; coming in
continuously above 10% of the total labour force,
and often nearly double the average unemployment
rate across the world as a whole. Over the decade to
2011, average unemployment across the Middle East
was 11.2%, while the average world unemployment
rate was 6.0%, according to International Labour
Organization data.
This high headline figure hides a significant variation in
unemployment rates across the region. GCC countries
have relatively low unemployment rates – lower, in
fact, than most of the Western world, at around 4.2%.
Non-GCC countries, however, tend to struggle with
unemployment rates above 10%. Data is scarce on this
subject across the region, however what is available
suggests that while Kuwait enjoyed an unemployment
rate as low as 2.1% in 2010, Iran struggled with
13.5% unemployment. Jordan and Saudi Arabia have
experienced comparatively high unemployment too,
at 12.5% and 10.0% respectively in 2010.
Looking forward, unemployment rates across Egypt
and Iran are expected to rise in the short term, as both
countries suffer from comparatively weak economic
performance, as shown in figure 4. Unemployment
is expected to rise to 13.7% in Egypt by 2014, and to
continue rising in Iran – potentially as high as 18.5%
by 2016.
0
0
Figure 4: Unemployment projections across selected
Middle East economies
%
2010
2030
% change
20
18
Source: United Nations Population Division
16
14
12
Population growth creates opportunities
– and challenges
10
On one hand, population growth should give the
Middle East a continuing economic advantage. Labour
is an input to most production processes, and a
higher supply should allow Middle Eastern countries
to produce more, pushing up their GDP. In addition,
the growing Middle East population supports an ever
larger market, making it an attractive investment
proposition to multinationals. However, population
growth also creates challenges, which have become
increasingly pertinent in recent years. Unemployment
remains a major issue across the region; rather than
being put to productive use, much of the region’s new
labour surplus is underutilised. Hence, with further
high growth in population expected, Middle Eastern
economies must prioritise measures to promote
economic growth, entrepreneurship and job creation.
A crucial part of this, of course, is ensuring that the
population has the relevant skills; fast-growing Asian
economies have been successful precisely because they
offer an abundance of highly skilled labour. Therefore,
a key challenge for the burgeoning region is to ensure
appropriate training schemes are in place so that the
growing population can also lead to growth in human
capital across the region.
4
8
6
2
0
Iran
Egypt
Source: IMF, Cebr analysis
Employment across the region remains
volatile
Even in Middle East economies with comparatively low
levels of unemployment, employment rates are often
volatile. GCC countries, despite their strong oil exports
and GDP growth, have struggled to provide secure
employment opportunities for their residents. While
helping to bankroll the huge investment in the region,
oil revenues can also make the creation of sustainable
employment opportunities worse, by pushing up
domestic prices and wages, making private-sector
employment outside the energy sector scarce.
Increasing reliance on immigrant labour, which is often
cheaper and more flexible, has also contributed to the
domestic unemployment problem. In 2008, 66.9% of
the GCC’s labour force was foreign, with immigrants
making up a stunning 94.3% of the Qatari workforce.3
Youth unemployment is a particular
concern, although Qatar bucks the trend
with high youth employment rates
With such a high proportion of the population under
the age of 30, youth unemployment is a significant
problem. The Middle East and North Africa region
has the highest regional youth unemployment rate in
the world, with nearly three in ten of all young people
(28.1%) unemployed in 20124. The youth-to-adult
unemployment ratio is the highest in the world, with
young people under the age of 24 more than four
times more likely to be unemployed than adults. Figure
5 below shows how low the proportion of young
people in employment is across the Middle East; with
the exception of Qatar, employment levels for young
people across the Middle East are decidedly low. Of
course, not all young people tend to be employed, as
many individuals in this age group engage in further
study rather than seeking work and are thus technically
outside the labour force, but the combination of a low
proportion of young people in employment and high
unemployment rates illustrates the challenge that the
region faces.
Although the average youth employment participation
rate across the world is 52.0%, in the Middle East
this is only 29.4%. The equivalent figure for the
GCC is slightly higher at 35.9%, but this is still low.
Only Qatar boasts a youth participation rate above
the world average. All other countries in the region
were below the world average, with Saudi Arabia
having the lowest level at 11.2%. This rate is unlikely
to be the result of large numbers of young people
entering education – both the UK and Germany had
youth participation rates above 47% in 2010, despite
significant proportions of young people pursuing
further education.
Figure 5: Percentage of people aged 15–24 in
employment, 2010
%
70
60
50
40
30
20
10
0
public sector across the region. The scale of public
sector employment among nationals in the region is
already significant, as illustrated in figure 6. This trend
is more pronounced in the GCC, but even in Egypt,
public sector employment as a percentage of the
total workforce accounted for about a quarter of all
employment between 2005 and 2010. By comparison,
the UK’s public sector accounts for about 19% of all
employment, while Germany’s equivalent figure is only
about 11.5%. Wage increases in recent years have been
used to boost incomes and share resource wealth.
Figure 6: Public sector employment as a % of total
employment of nationals, 2008
%
100
90
80
70
60
50
40
30
20
10
0
Bahrain
Oman
Saudi Arabia
Kuwait
Qatar
Source: Baldwin-Edwards, 2011
More massive public spending expansion
on its way
While this expansion in public spending has helped
economic growth in the short term, fuelling higher
consumption spending, it serves to further reduce the
attractiveness of private sector employment; potentially
a concern for longer-term productivity performance
and economic growth. For now though, the Middle
East is expected to record another year of solid growth
driven by booming infrastructure spending and the
further expansion in consumer spending. Figure 7
illustrates our forecasts for growth across the region
in 2013. Once again, Iraq is expected to record the
strongest growth – and Iran the weakest.
Figure 7: Forecast for economic growth across the
Middle East in 2012–14, annual percentage change
in GDP by country
%
12
10
8
6
4
2
0
Source: World Bank
-2
Public sector expansion attempts to
stem tide of high unemployment
While the unemployment issues continue to loom
large, in recent years Middle Eastern governments
have rapidly increased public spending, helping to
provide more employment – and better pay – in the
2012
2013
2014
Source: Cebr analysis
economic insight – middle e a st
Q1 2 013
Record Saudi budget means the boom
will continue
In Saudi Arabia the recent budget sets out plans
to further increase government expenditure. As oil
prices have held up, the government increased its
expenditure target by 19% to a record 820bn riyals
– more than double the value of the 2006 budget.
The biggest increase will be on education spending,
by 21%. This spending should help to tackle the
country’s employment problem, while also helping
to develop the skill-base needed if the economy is to
diversify away from oil production. This strategy had
some success last year, as non-oil GDP grew by 7.5% in
2012. We expect the government expansion to support
the economy, with growth at 5.9% in 2013. Despite
a slightly slower growth rate than 2012, the region’s
largest economy is expected to achieve the second
highest rate of expansion across the Middle East in
2013.
Saudi Arabia is not the only government in the
region continuing to significantly expand spending
through 2013. In Kuwait, estimates of fourth quarter
expenditure in 2012 suggest that the wages and
salaries component of the budget has increased by
25% year on year, mostly due to higher wages. As
shown in figure 7, we expect overall GDP growth to
slow to 4.2% in 2013 but this follows a robust 6.8%
expansion in 2012.
Oman, too, has announced that spending will be
increased by 29% from last year, with the stated aim
of providing 20,000 jobs and creating 36,000 more in
the private sector. Spending on education is to increase
by 40% year on year, with training schemes and job
creation programmes aiming to give young Omanis
the skills to enter the private sector. It is hoped that
infrastructure investment, accounting for a quarter of
the budget, will drive non-oil private sector growth
and create further job opportunities in the service
sector. Growth in Oman reached nearly 5% in 2012 but
is expected to slow slightly to just under 4% in 2013,
supported by further expansion in the public sector.
Abu Dhabi, the largest of the United Arab Emirates,
has also announced plans to build houses, schools and
other infrastructure in the last month, with the aim of
improving the incentives for firms to invest there. In
Dubai, spending is to increase this year by 6%. 26% of
all spending on healthcare, education and community
development in the emirate has been directed towards
a programme encouraging youth entrepreneurship.
It has certainly felt like a return to the boom times,
with the UAE benefiting from instability in other parts
of the region and the announcement of the massive
Mohammed bin Rashid (MBR) City development.
The UAE probably grew by around 4.3% in 2012; but
we expect this to slow slightly to 3.6% in 2013 as the
accelerative effect from the region’s massive expansion
in public spending over the last two years wears off
slightly.
In Bahrain, growth is likely to pick up in 2013 led by
increased oil production. However, after large increases
in public spending through 2011 and 2012, the
government is likely to seek to address the rising fiscal
deficit. Bahrain has the highest fiscal break-even oil
price in the GCC, meaning that the public finances are
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more stretched than other oil exporters. This spending
restraint is expected to constrain growth to a 2.4%
expansion in 2013 but this is up from growth below
2% in 2012 as oil production is ramped up once more.
At the other end of the spectrum to the GCC, troubles
in Egypt continue with the economy struggling to
record robust growth and create jobs to deal with its
large unemployment problem. We expect the Egyptian
economy to expand by 2.5% in 2013 following growth
below 2% in 2012. Major challenges remain but we
expect that 2014 could see stronger growth too.
In Iran, sanctions have certainly had a massive
economic impact. The economy is expected to have
contracted slightly in 2012 and to record only anaemic
growth barely above 0% in 2013. Officially, inflation
is running at around 27% but in reality it is probably
above 100% based on implied inflation rates from
the prices of gold and the exchange rate with the US
dollar. This is contributing to a pronounced squeeze
on consumer spending power – in stark contrast to the
bulging purse strings of consumers across the GCC,
boosted by fiscal expansion.
Hence, in general the Middle East continues to record
robust growth although the region is slowing from the
breakneck growth in 2011 and 2012 and considerable
variation remains, with economic performance in Egypt
and Iran running far behind the GCC countries.
High spending raises questions of
sustainability
The large expansion in public spending provides
a stimulus in the short term but questions remain
over its long-run sustainability. So far GCC countries
have financed their spending through increased oil
revenue, as the price of oil has remained consistently
high for the last three years. The risk remains that
if shale oil and gas really take off as a fuel source in
the West and beyond, demand for crude oil could
slip, and Middle Eastern countries could have to cut
their budgets very quickly. As growth in the region
is increasingly dependent on government spending,
even if the likelihood is small, this possibility should
not be ignored. Hence, spending which is expected to
increase productivity in the medium to long term, on
the other hand, is essential.
If the infrastructure spending and investment in
education fail to promote long-term growth, however,
the long-term outlook for the Middle East’s economies
is less secure. Quality of programmes, therefore, will be
critical. Kuwait, for example, has been warned by the
IMF that it will exhaust oil revenue by 2017 if spending
continues at current rates, with the combination of
falling capital expenditure and rising current
expenditure causing particular concern. Policies such
as an initiative proposed recently to write off interest
payments on bank loans made by nationals are unlikely
to prove a wise use of funds. Similarly, while Oman’s
planned spending has been designed to encourage
non-oil sector growth, the high break-even price
needed to avoid deficit financing, now $104 a barrel,
suggests the economy is increasingly vulnerable to
demand shocks. For now though, the region remains
one of the strongest bets for solid growth performance
in 2013.
economic insight – middle e a st
Q1 2 013
ENDNOTES
1The phrase Middle East is often used to cover different parts of the region. Much of the internationally-available economic data relates to the Middle East
and North Africa region which we call MENA (this covers the seaboard countries in North Africa from Somalia to Mauretania and all the states in the Arabian
peninsula including Israel, plus Iran and Turkey in the north). Political discussions often treat the Middle East as synonymous with the Arab world. But if we
refer to wider definitions of the region, we will try to point this out explicitly.
2 That is the Middle East as understood by the ‘GCC+5’.
3 Baldwin-Edwards, M. (2011), Labour immigration and labour markets in the GCC countries: national patterns and trends, LSE Global Governance and
Kuwait Programme on Development, Governance and Globalisation in the Gulf States.
4 ILO Global employment trends 2013.
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© ICAEW 2013 MKTPLN12089 02/13