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GCC & Egypt Outlook
19.05.2025The global economic outlook has markedly weakened due to tariff developments with the IMF slashing its growth forecast to 2.8% in 2025, driven by hits to the US and China. The US Fed is in a tricky position, but given the near-term inflation risks is unlikely to cut interest rates aggressively this year. Oil prices are forecast at $70 on average, with risks to the downside given weak global demand and a faster unwind of earlier OPEC+ output cuts. Amid this unfavorable backdrop, GCC non-oil growth is expected to hold up quite well at 3.6% in 2025-26, with growth in Saudi Arabia and the UAE easing due to moderating investment rates but still strong. The aggregate GCC fiscal deficit will be small though this masks big country-level differences with Bahrain’s much larger. In Egypt, macro-stabilization steps are giving way to faster growth, alongside evidence of a more flexible currency regime.
Global growth outlook dims amid steep US tariff hikes
The global growth outlook has markedly weakened driven by the tariff developments and the ongoing elevated uncertainty. The IMF recently slashed global growth to 2.8% in 2025 and 3% in 2026 from 3.3% for both years previously. Among major economies, the steepest downgrades were unsurprisingly for the US and China, with US growth cut by 0.9 percentage points to 1.8% in 2025 and China growth lowered by 0.6 percentage points to 4%. Growth in the Eurozone, UK, and Japan was also lowered to 0.8%,1.1%, and 0.6%, respectively, in 2025. In the US, a recession is still avoidable although its odds have increased while a reinstatement by the US of the currently-paused ‘reciprocal’ tariffs means a recession will be likely in our view. The hope is that recession fears, financial market reactions, and other pressure dynamics will help in course-correcting policy. The Chinese economy will face significant pressure from the trade war with the US, and policy support is likely needed to hit the “around 5%” 2025 growth target.
The status of US’s ‘reciprocal’ tariffs and developments on trade negotiations are key in altering the outlook. Trade negotiations are expected to be difficult, and any positive developments will likely be cheered by markets although the impact on trade balances will take years to assess. In terms of inflation, for the US, tariffs are inflationary, but lower oil prices and the weaker economic activities are deflationary forces. The US Fed is in a tricky spot over interest rates given the stagflation risks ahead but has signaled that it is in no rush to cut interest rates for now. Our base case in this report is that the near-term inflationary risks mean that US policy rates come down by at most 50 bps this year, with steeper cuts in 2026 only if inflation subsides and the US economy shows signs of a more severe economic downturn.
Our baseline forecast has Brent oil prices at $70/bbl in 2025-26, with risks are skewed to the downside. The slowing global growth outlook adds to what was already a weak outlook for oil demand growth: the International Energy Agency sees oil demand growing 0.7 mb/d y/y in 2025-26, the slowest rates since pandemic-affected 2020. A reversal of the aggressive US tariff policy measures could help support prices by improving demand conditions. On the supply side, OPEC+’s (now quicker) unwind of 2.2 mb/d in supply cuts will result in weaker oil market balances this year and next, though potentially improve member conformity with mandated quotas and group cohesion over time. This OPEC+ supply approach is likely to pressure oil prices but also help hydrocarbon sector GDP climb further this year and next in Saudi Arabia, Kuwait, and Oman. Upside price risks include a resurgence in regional geopolitical tensions between Israel and Iran, stricter US sanctions on Iranian crude flows and a more resilient-than-expected global economy.
GCC growth to broadly hold up despite oil price drop
Although downside risks to the Gulf economy have risen in recent months, we expect regional growth to hold up well overall in 2025-26. GDP will expand by 3.6% on average helped by the ongoing unwind of earlier oil production cuts, which is set to be accelerated at time of writing. Non-oil growth is forecast at a solid 3.5% per year – only slightly below the estimated 4% of 2024. This includes some slowdown in the region’s best-performing economies, Saudi Arabia (3.6%) and the UAE (3.9%), as investment spending moderates but nevertheless remains well-supported by government reform and diversification initiatives. We see only a small aggregate GCC fiscal deficit of 1.5% of GDP this year, though this masks big country-level differences with Bahrain’s deficit much larger at 9% of GDP and renewed support from the GCC probably needed to fill the financing gap. A larger oil price drop, higher-for-longer interest rates and increased regional security pressures are the main downside risks to the GCC growth outlook. Faster interest rate cuts, an easing in the global trade war and an oil price rebound are upside risks.
In Egypt, the outlook has significantly improved following the macro-stabilization policies enacted last year. GDP growth is seen accelerating to 4.7% in FY25/26 helped by sharp cuts in interest rates reflecting lower inflation. We also expect confirmation of a more flexible rate exchange regime, a key ask of the IMF and needed to avoid a return to the boom-bust cycles of the past. A big drop in oil prices would represent a mixed-bag for Egypt, reducing inflation and the energy import bill, but at the same time potentially jeopardizing investments from the GCC if Gulf governments’ financial positions become much more squeezed.
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