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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. BUSINESS WITH CONFIDENCE icaew.com/economicinsight 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 icaew.com/economicinsight cebr.com 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 icaew.com/economicinsight cebr.com 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. ICAEW ICAEW is a professional membership organisation, supporting over 140,000 chartered accountants around the world. Through our technical knowledge, skills and expertise, we provide insight and leadership to the global accountancy and finance profession. Our members provide financial knowledge and guidance based on the highest professional, technical and ethical standards. We develop and support individuals, organisations and communities to help them achieve long-term, sustainable economic value. Because of us, people can do business with confidence. Cebr Centre for Economics and Business Research ltd is an independent consultancy with a reputation for sound business advice based on thorough and insightful research. Since 1992, Cebr has been at the forefront of business and public interest research. They provide analysis, forecasts and strategic advice to major multinational companies, financial institutions, government departments, agencies and trade bodies. For enquiries or additional information, please contact: Sarah-Jane Carter Regional Marketing Manager, Middle East T +971 (0)4 408 0000 E [email protected] ICAEW Currency House Unit 4 Level 4 Dubai International Financial Centre PO Box 506836 United Arab Emirates icaew.ae ICAEW Chartered Accountants’ Hall Moorgate Place London EC2R 6EA UK icaew.com © ICAEW 2013 MKTPLN12089 02/13