Why did the prospects of the Persian Gulf economies become darker?

Gulf economies are expected to shrink sharply this year as long-term disruptions in energy production and shipping through the Strait of Hormuz outweigh the benefits of rising oil and gas prices, according to the latest IMF forecasts. Post Why did the outlook of the Persian Gulf economies become darker? It first appeared in Safir Arjan.

According to Ambassador Arjan, the October edition of the International Monetary Fund's (IMF) "Eyes on the World Economy" report indicates a sharp decline in growth in economies that are more exposed to interruptions in hydrocarbon production and transportation, and Kuwait, Qatar and Bahrain are facing double-digit negative growth rates.

The deterioration highlights one of the main features of regional shocks: higher global energy prices offer limited protection when producers cannot maintain production or deliver exports to customers.

The damage also extends beyond hydrocarbons, as weaker trade, higher costs and uncertainty affect business activity and complicate efforts to diversify Gulf economies.

Smaller Gulf producers face the sharpest cuts

The International Monetary Fund predicts that Kuwait's economy will shrink by 16.7 percent this year, while Qatar is expected to shrink by 15.6 percent and Bahrain by 11.3 percent.

According to the lender's October report, Kuwait's economy is expected to shrink by 15.6 percent and Bahrain's economy by 11.3 percent.

The economies of Saudi Arabia and the United Arab Emirates are also expected to contract, but less severely than smaller producers, reflecting differences in economic structure and exposure to disrupted export routes.

Saudi Arabia's economy is expected to shrink by 3.3 percent this year, a sharp turnaround from the fund's forecast of 1.7 percent growth in July. This change represents a decrease of five percentage points in just three months.

The International Monetary Fund expects Saudi Arabia's growth to return to 7.9 percent in 2027, compared with the lender's previous forecast of 5.5 percent, suggesting some of the lost activity this year could return as conditions improve.

The UAE economy is expected to shrink by 3.9 percent this year and then grow by 7.7 percent next year.

Iraq, outside the six-member Gulf Cooperation Council, faces projected negative growth of 16 percent, indicating broader exposure of regional energy exporters to the disruption.

These figures are forecasts for actual annual economic output, not confirmed results for the full year, and are still sensitive to conflict trends and trade recovery.

The outlook worsens as the disorder progresses

The new projections represent a significant deterioration from the IMF's spring assessment.

In April, the fund still forecast 2 percent growth for the entire GCC economy in 2026. Country forecasts included a contraction of 8.6 percent for Qatar, 0.6 percent for Kuwait and 0.5 percent for Bahrain.

In the previous outlook report, a relatively short-term conflict was assumed, with trade resuming and production returning to normal by mid-year.

Thus, continued disruption has undermined the main premise behind earlier forecasts and exposed economies to a longer period of reduced production and disruption in logistics.

Higher prices cannot replace lost production

IMF chief Kristalina Georgieva warned Gulf finance ministers and central bank governors on October 1 that the region's economy is expected to shrink as hydrocarbon production drops sharply and growth outside the sector slows.

He introduced the closure of the Strait of Hormuz, disruption in the Red Sea and damage to energy facilities as restrictions on exports and production capacity.

Declining trade, weaker business confidence and higher commodity prices are also limiting non-hydrocarbon activities, he said.

For energy producers, it is important to distinguish between prices and volumes. A higher price per barrel can support revenue from oil that is sold, but it does not recover barrels that cannot be produced or shipped.

Real GDP measures output after accounting for price changes. Consequently, an increase in export prices does not automatically prevent the economy from contracting when physical production declines.

This also helps explain why an energy shock can simultaneously raise import costs elsewhere and reduce economic activity in countries supplying those goods.

A strong recovery does not make up for all losses

IMF forecasts predict significant recovery in several hard-hit economies next year as production, exports and logistics normalize.

It is predicted that Qatar will experience 18.8% growth in 2027, Kuwait will experience 17.1% growth and Bahrain will experience 13.9% growth. The wider Middle East and Central Asia region is also expected to grow by 6.3% this year, after contracting by 0.3% this year.

However, these large percentage jumps are partly due to the lower base level that followed this year's contractions.

Applying the predicted annual changes shows this distinction. Kuwait's production will drop from an index of 100 in 2025 to 83.3 in 2026, then recover to approximately 97.5 in 2027. Therefore, despite the double-digit growth, it will remain about 2.5% below its 2025 level.

The projected contraction and recovery of Qatar's economy will bring production back to roughly its 2025 level. Neither calculation takes into account the additional production that might have occurred had the disruption not occurred.

Financial and logistical shocks shape flexibility

Georgieva said the government's actions and investment in energy and logistics infrastructure, including by redirecting resources and supporting companies and banks, have helped contain the wider fallout.

He stressed, however, that financial shocks cannot replace physical resilience to business shocks.

The Fund's policy recommendations call for temporary and targeted support where necessary, while avoiding extensive stimulus when a major constraint would disrupt supply.

According to Ambassador Arjan's report, with the normalization of the situation, the fund recommends that the financial buffers be restored and investment in diversification and economic security be maintained.