GCC economy to shrink in 2026 before 8.1% growth rebound in 2027, report says

Dubai: The UAE and wider Gulf economies are expected to bounce back strongly in 2027 after absorbing the impact of regional conflict, with GCC GDP forecast to expand by 8.1 per cent.

This would happen as energy trade routes normalise, tourism demand returns and business confidence improves, according to a new economic report.

The recovery forecast follows an expected 2.4 per cent contraction in GCC GDP in 2026, as disruption to energy exports, travel and investor sentiment weighs on regional activity, according to the latest Economic Insight: Middle East Q2 2026 report by ICAEW and Oxford Economics.

The report’s baseline scenario assumes a ceasefire agreemen is reached by the end of July 2026 and that operations through the Strait of Hormuz return to normal by the end of the year.

A US-Iran framework agreement announced after the report was finalised is broadly in line with this scenario, although the implementation of the agreement remains a key factor.

Azad Zangana, Head of GCC Macroeconomic Analysis at Oxford Economics, said: “The economic damage from the conflict is concentrated and measurable. Energy output has fallen sharply, tourism has been disrupted, and investment activity has slowed. But the recovery in our baseline is rapid.”

He added, “An 8.1 per cent expansion in GCC GDP in 2027 and a 23.5 per cent rebound in oil sector output point to a region that is well positioned to recover quickly as trade routes reopen and travel demand returns.”

 The report said Saudi Arabia and the UAE have been better positioned to manage the disruption, with both countries able to reroute some exports through alternative pipelines, reducing the impact compared with other GCC energy producers.

Non-oil activity in the UAE and Saudi Arabia has remained relatively resilient, with May Purchasing Managers’ Index (PMI) surveys showing business output growth reaching its strongest level in three months, supported by stronger domestic demand.

Across the GCC, however, non-energy sectors are expected to contract by 1.1 per cent in 2026 before returning to growth from 2027 onwards.

The energy sector has absorbed the biggest immediate impact. GCC oil output is forecast to fall by 14.5 per cent in 2026 — the sharpest decline in several decades — before rebounding by 23.5 per cent in 2027 as production recovers. Average Brent crude oil prices are forecast at $90 per barrel in 2026.

Hanadi Khalife, Regional Director MEASA, ICAEW, said: “The scale of disruption this year has been significant, and the economic data reflects that clearly. What the data also shows, however, is how the region has adapted."

He added, "Governments have moved quickly to support activity, alternative trade routes have been activated, and domestic demand has held up better than many expected. The recovery projected for 2027 is substantial, and the conditions for it are already taking shape.”

Travel and tourism have been among the sectors most affected by the disruption, with inbound arrivals to the GCC expected to decline by about 30 per cent in 2026. The report estimates the decline will translate into tens of millions fewer visitors and tens of billions of dollars in lost tourism spending across the region.

Unlike energy, tourism recovery is expected to take longer because travel demand is closely linked to accessibility and visitor confidence.

 However, the report said the GCC’s established tourism infrastructure, continued investment in capacity and national tourism strategies provide a foundation for recovery once conditions improve.

 Despite the economic shock, GCC governments are expected to continue increasing spending this year, maintaining investment in areas including financial services, technology and healthcare.

The report noted that most GCC countries have relatively modest debt levels, with funding risks remaining contained.

Investor confidence has also continued, with Bahrain completing a $1 billion oversubscribed sovereign bond issuance in June — the first such issuance from the region since the conflict began.

The report said the UAE Central Bank’s liquidity management measures have helped ease immediate pressure in domestic markets, with Gulf sovereigns and government-linked entities expected to return to international debt markets as conditions stabilise.

Inflationary pressures across the GCC are expected to remain contained despite the disruption.

GCC consumer price inflation is forecast to average 2.6 per cent in 2026, with food prices being the main source of upward pressure. Inflation is expected to ease to 2.1 per cent in 2027 as temporary supply-side pressures fade.

While ICAEW expects the GCC economy to contract 2.4 per cent in 2026 due to conflict-related disruption before rebounding strongly in 2027, the World Bank sees a steadier recovery path, forecasting growth of up to 4.8 per cent over 2026-2027 as oil output rises and non-oil sectors expand.”