Why Economic Diversification Can Shape Arabian Markets

Risks are slanted to the downside. In case of an extended dispute, the present impacts on the region will be compoundedthrough raised energy and food costs, declining trade, tourist and remittances, increased financial pressures, and displacement. "The present crisis is a plain pointer of the work ahead for the region: not just to weather shocks, but to reconstruct more durable economies with more powerful macroeconomic fundamentals, innovate and improve governance, invest in infrastructure, and improve employment-creating sectors," said.

With peace and the ideal action, countries can construct the institutions, abilities and competitive sectors that produce opportunities for people." With this long-lasting vision in mind, the report takes a close take a look at the area's capacity for commercial policy government actions to increase tactical business activity as a motorist of economic development and task production.

ANSR July GCC PRs 50DR+

Federal governments in the area have actually embraced commercial policy at a high rate in the last years, frequently through sovereign wealth funds and state-owned business, however the results have actually been blended. The report highlights the important need for strong institutions and careful targeting of policies. "As countries face the heavy toll of the present dispute, it is necessary to also not forget the work needed for long-lasting peace and prosperity," stated.

Essential Industrial Shifts in 2026

Q2 2026: The ICAEW Economic Update Middle East, is a quarterly economic projection for the region prepared straight for the finance profession. The GCC economy faces a marked contraction this year pending information of the US-Iran agreement to end the war. We anticipate energy flows, tourist and financier sentiment to slowly normalise as war disruptions diminish.

ANSR July GCC PRs 50DR+

The interim contract between the US and Iran is a substantial action towards reaching a full-blown deal. A full return to normality in the Strait of Hormuz will likely require time, but the danger of a recession-inducing oil rate spike has declined. International GDP is expected to grow by 2.4% this year, 0.2 ppt less than we predicted 3 months earlier, and 3.1% in 2027.

We anticipate a 4.1% contraction in Middle East GDP this year (versus predicted 3.6% expansion before the war), higher than the decrease in the first year of the Covid pandemic. Kuwait, Iran, Iraq and Qatar stand apart as the hardest struck, owing to their failure to prevent the disruption to regional shipping, war-driven infrastructure damage and tourist losses.

Our 2026 outlook for the GCC is weaker than 3 months ago, with GDP projection to contract by 2.4% compared to a 0.2% decline forecasted formerly. We anticipate Oman and Saudi Arabia to be the least negatively impacted by the fallout from the dispute, with both economies continuing to expand this year.

The financial damage incurred in the last couple of months is considerable. Saudi GDP information for Q1 revealed development slowed to 3% y/y, with non-oil activities broadening by 2.9%, the weakest pace since the Covid pandemic. On a seasonally adjusted basis, GDP contracted 1.2% q/q, driven by a 6.8% fall in oil activities as the Strait of Hormuz interruption struck late in the quarter.

How Industrial Diversification Will Shape GCC Markets

Aside from Oman, all GCC manufacturers as well as Iran and Iraq have suffered extensive oil and gas production losses given that the start of the dispute. May data reveal local production almost cut in half from pre-war levels, with the decrease deepening relative to March and April. Rerouting efforts, consisting of by Saudi Arabia through the East-West Pipeline and the UAE through the Habshan-Fujairah pipeline, have actually helped prevent an even bigger plunge in output.

ANSR July GCC PRs 50DR+

Nevertheless, we anticipate GCC oil sector output to agreement by 14.5% this year, which will mark the steepest decrease in a number of decades. We then anticipate a 23.5% rebound next year, driven mostly by normalisation from a badly depressed base. On the other hand, oil costs have been unpredictable, alleviating listed below $85 per barrel as the interim contract was revealed.

In the medium term, we expect oil prices to be slightly lower than our pre-war baseline, as the UAE's departure from OPEC+ allows for a steady boost in its output towards the 5mn barrel per day production target once trade normalises. Against this background, the UAE will accelerate the building and construction of a new West-East pipeline that ought to double the capacity of export through Fujairah.

The May PMI surveys reported output growth reaching its strongest level in three months, driven largely by improved domestic demand. However, they remain listed below long-run averages, with weak export orders and price pressures from higher material and transportation expenses are a common style. In general, we anticipate a 1.1% contraction in GCC non-energy sectors this year (compared to 4.2% development pre-war) and a steady healing over the rest of the years.