Regional economic growth will substantially slow down this year amidst poor business confidence due to low prices and austerity measures but the growth is projected to bounce back strongly next year.

According to an International Monetary Fund's latest update, growth in the Middle East, North Africa, Afghanistan, and Pakistan (Menaap) region is projected to slow considerably in 2017, reflecting primarily a slowdown in activity in oil exporters, before recovering in 2018.

"The growth outcome in 2016 is estimated to have been considerably stronger in light of higher growth in Iran. The recent decline in oil prices, if sustained, could weigh further on the outlook for the region's oil exporters," IMF said.

The regional will nearly halve from five per cent in 2016 to 2.6 per cent this year; but it's expected to pick up to 3.3 per cent next year.

The IMF projected that the Saudi economy will stall this year due to low oil prices and austerity measures, recording merely 0.1 per cent growth but will pick up pace next year, achieving 1.1 per cent growth rate.

The IMF recently projected a 1.3 per cent growth in the UAE's real GDP in 2017, which it expects to surge to 3.4 per cent in 2018, evidencing that the decline in sentiment may only be for a shorter period with confidence expecting to return in 2018.

A survey by Global Economic Conditions Survey (GECS) released on Sunday reported poor business confidence in the Middle East in Q2 due to sustained low oil prices.

"The one encouraging feature is a further rise in the government spending expectations component. This reflects the fact that austerity in the region, which was a key drag on growth in 2015 and 2016, is slowly starting to ease. It is notable that this sub-component is now at its highest level since the second quarter of 2015," the survey stated.

Business confidence across the Middle East has fallen sharply in the last quarter and is now at its lowest level since the second quarter of 2016, GECS said.

The sharp fall mirrors the oil price, which has fallen to below $45 a barrel in recent weeks due to fears of a further increase in US oil production. Oil prices were as high as $55 a barrel in late February.

Looking ahead, the region faces a number of headwinds over the next year. A key drag on growth is likely to come from higher interest rates: most of the region's countries peg their currencies to the US dollar, which means that if interest rates in the US continue to rise (as the Fed itself expects them to), local rates will also rise. This will drag on demand, GECS survey revealed on Sunday.

"We may experience a further decline in sentiment within the Middle East, as a result of higher interest rates - with local rates pegged to the US dollar. We are also likely to see a fall in oil output as countries reduce production to comply with the latest Opec deal," said Lindsay Degouve de Nuncques.

"The other headwind will come from falling oil output as countries in the Middle East look to reduce production as part of their efforts to comply with the latest Opec deal. The breakdown shows a fall in the investment opportunities and capital expenditure sub-components for the Middle East," it noted.

Source: Khaleej Times