GCC economy set for 6.4% contraction in 2026 before 5.8% rebound in 2027

The GCC economy is expected to contract sharply in 2026 before returning to growth next year, but the pace of recovery will depend heavily on the stabilisation of oil markets, the restoration of energy flows and the resilience of non-oil sectors.

The GCC economy is forecast to shrink by 6.4 per cent in 2026, followed by 5.8 per cent growth in 2027, according to the latest Economic Insight: Middle East Q3 2026 report from ICAEW and Oxford Economics.

The forecast reflects the impact of renewed regional conflict on Saudi Arabia’s oil export infrastructure, including disruption to the East-West pipeline, alongside higher energy prices and interruptions to regional trade and shipping.

The projected rebound in 2027 therefore represents less a broad-based acceleration than a gradual normalisation of the energy sector, with the recovery expected to vary significantly across GCC economies.

Oil remains central to the 2027 recovery

The GCC hydrocarbon sector is forecast to contract 26.9 per cent in 2026 before rebounding 25.9 per cent in 2027 as energy markets stabilise.

Saudi Arabia is expected to see a similar reversal, with its economy forecast to contract 4.6 per cent this year before growing 4.7 per cent in 2027.

The outlook highlights the continued influence of oil production and exports on the kingdom's broader economic performance. Damage to the East-West pipeline and disruption affecting Red Sea ports have reduced the options available for rerouting energy exports, according to the report.

The UAE is forecast to grow 6.6 per cent in 2027 after a projected 1.5 per cent contraction in 2026. Qatar is expected to record the strongest expansion among the GCC economies covered, at 11.5 per cent, reflecting its exposure to energy exports linked to the Strait of Hormuz.

The forecasts underline an important distinction in the GCC outlook: higher oil prices do not automatically translate into stronger economic activity when production and export infrastructure remain disrupted.

Non-oil sectors face a slower recovery

The recovery outside hydrocarbons is expected to be more gradual. Non-oil GCC sectors are projected to contract 1.9 per cent in 2026 before growing 3.3 per cent in 2027. Improving consumer confidence and easing price pressures are expected to support activity, although the pace of recovery will depend on how quickly regional uncertainty fades.

There are already signs of resilience in some markets. Saudi Arabia’s non-oil private sector expanded further in August, with its purchasing managers’ index reaching a six-month high of 53.8. Similar indicators in the UAE and Kuwait pointed to continued non-oil activity despite geopolitical pressures.

This suggests that the region's diversification efforts continue to provide some buffer against volatility in the energy sector. 

However, the scale of the overall GCC contraction means non-oil growth is unlikely to fully offset the impact of disruptions to hydrocarbons in the near term.

Tourism recovery could take longer

Tourism is among the sectors facing a more prolonged adjustment, particularly in the UAE.

The sector accounts for around 13 per cent of UAE GDP, according to the report. Visitor numbers are forecast to decline 46.7 per cent in 2026 before rebounding 30 per cent in 2027 and a further 59 per cent in 2028.

Even with that recovery, visitor numbers are not expected to return to pre-conflict levels until 2028.

The projected trajectory points to the wider economic cost of prolonged regional uncertainty. Tourism, aviation, hospitality and related consumer sectors can remain under pressure even after energy markets begin to stabilise.

Higher energy prices could keep borrowing costs elevated

The economic impact is also likely to extend into monetary policy and household spending. GCC government spending growth is forecast to slow to 2.6 per cent in 2027 from 7.4 per cent in 2026, before accelerating again in 2028.

Meanwhile, inflation is expected to ease only modestly, from 2.5 per cent in 2026 to 2.1 per cent in 2027. Persistent food and beverage price pressures are expected to limit the pace of disinflation.

The report also expects the US Federal Reserve to raise interest rates again in December, with GCC monetary policy expected to follow. As a result, borrowing costs could remain elevated for longer, with rate cuts across the region not expected until 2028.

For businesses, that could affect investment decisions, financing costs and the pace at which projects are restarted or expanded.

Recovery remains dependent on energy and trade flows

The broader Middle East outlook remains uneven. Iran's economy is forecast to contract 11 per cent in 2026, while Iraq is projected to grow 18.1 per cent in 2027 following a 20.8 per cent contraction this year. Jordan is forecast to remain comparatively stable, with growth of 2.8 per cent in 2026 and 2.6 per cent in 2027.

The GCC forecast itself is based on a baseline scenario in which trade and energy flows gradually recover through 2027 but remain below pre-conflict levels for some time.

That assumption is significant. Continued disruption to Saudi oil exports or regional shipping routes could alter the recovery path, while faster normalisation could improve the outlook.

Hanadi Khalife, Regional Director MEASA at ICAEW, said businesses across the region had been adapting by rerouting supply chains, reassessing financing plans and rebuilding confidence despite continued uncertainty.

Azad Zangana, Head of GCC Macroeconomic Analysis at Oxford Economics, said non-oil activity and consumer confidence were performing better than headline growth figures suggested, but the damage to Saudi oil infrastructure and elevated energy prices were likely to delay a fuller recovery.

The 2027 outlook therefore rests on two parallel developments: the stabilisation of the region's energy and trade networks, and the ability of non-oil sectors to sustain momentum while those disruptions unwind.