Why Economic Diversification Will Shape Arabian Markets

Risks are tilted to the disadvantage. In case of an extended conflict, the current influence on the region will be compoundedthrough raised energy and food prices, decreasing trade, tourism and remittances, increased fiscal pressures, and displacement. "The existing crisis is a stark reminder of the work ahead for the area: not just to weather shocks, however to rebuild more resistant economies with stronger macroeconomic principles, innovate and improve governance, buy facilities, and enhance employment-creating sectors," stated.

With peace and the best action, nations can construct the institutions, capabilities and competitive sectors that produce opportunities for individuals." With this long-term vision in mind, the report takes a close take a look at the region's capacity for commercial policy federal government actions to increase tactical service activity as a chauffeur of economic development and task production.

ANSR July GCC PRs 50DR+

Federal governments in the region have actually embraced industrial policy at a high rate in the last decade, often through sovereign wealth funds and state-owned enterprises, however the outcomes have actually been blended. The report highlights the critical requirement for strong institutions and cautious targeting of policies. "As countries face the heavy toll of today conflict, it is very important to also not forget the work needed for lasting peace and success," said.

Driving Industrial Success through Strategic Diversification

Q2 2026: The ICAEW Economic Update Middle East, is a quarterly economic projection for the area prepared straight for the finance profession. The GCC economy faces a significant contraction this year pending information of the US-Iran contract to end the war. We anticipate energy circulations, tourist and investor belief to slowly normalise as war interruptions subside.

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 go back to normality in the Strait of Hormuz will likely require time, however the risk of a recession-inducing oil rate spike has actually decreased. Worldwide GDP is expected to grow by 2.4% this year, 0.2 ppt less than we forecasted 3 months earlier, and 3.1% in 2027.

We anticipate a 4.1% contraction in Middle East GDP this year (versus forecasted 3.6% growth before the war), higher than the decline in the first year of the Covid pandemic. Kuwait, Iran, Iraq and Qatar stand out as the hardest hit, owing to their failure to prevent the interruption to local shipping, war-driven infrastructure damage and tourism losses.

Our 2026 outlook for the GCC is weaker than three months back, with GDP projection to agreement by 2.4% compared to a 0.2% decline projected formerly. We expect Oman and Saudi Arabia to be the least negatively affected by the fallout from the dispute, with both economies continuing to expand this year.

The financial damage sustained in the last couple of months is significant. Saudi GDP data for Q1 showed development slowed to 3% y/y, with non-oil activities broadening by 2.9%, the weakest speed 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 hit late in the quarter.

2026 Investment Climate of Arabia

Aside from Oman, all GCC producers as well as Iran and Iraq have suffered extensive oil and gas production losses given that the start of the dispute. Might data reveal regional production almost cut in half from pre-war levels, with the decline 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 assisted prevent an even bigger plunge in output.

ANSR July GCC PRs 50DR+

Nevertheless, we anticipate GCC oil sector output to contract by 14.5% this year, which will mark the steepest decrease in numerous decades. We then anticipate a 23.5% rebound next year, driven mainly by normalisation from a severely depressed base. Oil costs have been unpredictable, easing listed below $85 per barrel as the interim agreement was announced.

In the medium term, we anticipate oil costs to be slightly lower than our pre-war standard, as the UAE's departure from OPEC+ permits for a progressive boost in its output towards the 5mn barrel daily production target when trade normalises. Against this backdrop, the UAE will speed up the construction of a new West-East pipeline that need to double the capacity of export through Fujairah.

The May PMI studies reported output development reaching its strongest level in three months, driven mostly by enhanced domestic need. They remain listed below long-run averages, with weak export orders and cost pressures from greater material and transport costs 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 gradual recovery over the remainder of the years.