Gulf growth rebound hinges on Hormuz reopening

Gulf economies are forecast to stage a sharp rebound in 2027 after a conflict-driven contraction this year, as energy exports recover, travel demand returns and business confidence improves across the six-member Gulf Cooperation Council.

The latest ICAEW-Oxford Economics Economic Insight report projects GCC gross domestic product to shrink 2.4 per cent in 2026, before expanding 8.1 per cent in 2027. The forecast marks one of the starkest short-term reversals in the region’s outlook since the pandemic, with the downturn tied to disruption in energy exports, tourism flows and investment activity caused by the regional conflict.

The projections rest on a baseline scenario that assumes a ceasefire agreement is reached by the end of July and the Strait of Hormuz returns to normal operations by the end of the year. A US-Iran framework agreement, with formal signing scheduled for 19 June in Switzerland, is being treated as broadly consistent with that assumption, though any delay in implementation would leave the outlook vulnerable.

The GCC oil sector is forecast to contract 14.5 per cent in 2026, its steepest fall in several decades, before rebounding 23.5 per cent in 2027 as output and exports recover from a depressed base. Brent crude is forecast to average about $90 a barrel this year, but higher prices are expected to offer only partial relief because export volumes have been curtailed.

Saudi Arabia and Oman are expected to be the least affected Gulf economies this year, with both forecast to continue growing despite the disruption. Saudi Arabia and the UAE have also been able to reroute part of their energy exports through alternative pipelines, easing some of the pressure faced by producers more reliant on the Strait of Hormuz.

The latest projections point to an uneven regional impact. Qatar, Kuwait and Bahrain face sharper pressure because of their greater exposure to disrupted shipping routes and limited alternative export options. The UAE is expected to show relative resilience in non-oil activity, though logistics, travel and investor sentiment remain exposed to regional uncertainty.

Non-energy sectors across the GCC are forecast to contract 1.1 per cent in 2026 before returning to growth next year. Purchasing Managers’ Index surveys for May showed output growth in Saudi Arabia and the UAE reaching its strongest level in three months, supported by domestic demand, but the broader regional picture remains weighed down by weaker external demand and delayed investment decisions.

Saudi Arabia’s economy expanded 3 per cent year-on-year in the first quarter of 2026, while oil-related activity fell 6.8 per cent quarter-on-quarter as shipping through the Strait of Hormuz was disrupted late in the period. Non-oil activity rose 0.3 per cent, helped by government spending and domestic demand.

Tourism is expected to face a longer recovery path than energy. Inbound arrivals to the GCC are forecast to fall by around 30 per cent in 2026, implying tens of millions fewer visitors and tens of billions of dollars in lost spending. The impact is expected to be felt across airlines, hotels, retail, food services and entertainment, with the pace of recovery dependent on security conditions and traveller confidence.

Governments across the Gulf are expected to maintain spending on strategic sectors, including technology, healthcare, financial services and infrastructure. Most Gulf states continue to carry relatively low debt burdens, giving them scope to support domestic demand without a severe tightening of fiscal policy. Bahrain’s $1 billion sovereign bond issuance, which was oversubscribed, has reinforced signals that investor appetite for Gulf debt remains intact despite the conflict shock.

Inflationary pressures are expected to remain contained compared with previous global energy shocks. Consumer price inflation across the GCC is forecast to average 2.6 per cent in 2026, easing to 2.1 per cent in 2027 as supply-side pressures fade and trade flows normalise.