The report, `Economic Insight: Middle East Q2 2016′, produced by Oxford Economics, ICAEW’s partner and economic forecaster, said that as GCC economies continue to diversify away from oil-driven investment and public spending, productivity growth will become vital.
Despite strong GDP growth and previously high oil prices, the GCC region’s overall productivity performance has not been encouraging. Between 2002 and 2015, it made zero or negative contributions to GCC economies at the whole economy level and showed only marginal improvements when focusing on the non-oil sector.
By contrast, output per worker contributed 1.5 pp in Singapore and 4 pp in Vietnam per year over the same period.
However, this obscures a number of structural movements within the GCC region’s economies – diversifying into new sectors, accommodating an expanding workforce to achieve this and increasing female participation.
Graeme Harrison, ICAEW economic advisor and director of Oxford Economics’ Macroeconomic Consultancy for EMEA, said: “The productivity underperformance across the GCC is partly caused by workforces diversifying into more labour-intensive sectors.:
He added: “This has meant an increase in the working age population thanks to increased migration to support new sectors and again from greater female participation in the workforce. So, GDP per capita has risen faster than output per worker.”
On aggregate, the female labour market participation rate has increased 3 pp in the GCC over the last 15 years, compared to falling by over 4 pp in Emerging East Asia. Recent research by Oxford Strategic Consulting suggests women in the region are increasingly targeting higher value-added service sectors like banking and financial services. Success in this area would support both overall GDP and productivity growth.
Raising worker productivity
Michael Armstrong, FCA and ICAEW regional sirector for the Middle East, Africa and South Asia, said: “Focusing on output per worker fails to account for wider sectoral and labour force rebalancing, so this is slightly misleading. However, it remains crucial for GCC countries to raise the productivity of individual workers.”
This can be done by increasing their access to capital, their skills and the competitive environment in which they work, he said.
Armstrong added: ” At the same time, governments will need to sustain progress made from their diversification efforts and attract more women into the workforce. They will also need to increase job prospects for nationals and reduce levels of youth unemployment in order to realise short-term growth within the context of sustained low oil prices.”
A meaningful change in the oil market climate is unlikely for at least the next six months. With oil exporters failing to secure a production freeze, the price of Brent Crude is expected to be around USD 38 per barrel in 2016 and average USD 43 a barrel next year.
Most GCC countries will see a slowdown in growth momentum in 2016, because of the direct impact of low oil prices, fiscal adjustment programmes, market pressures on currency pegs and tightening liquidity conditions.
Fiscal austerity has taken the form of spending cuts, including reductions to fuel subsidies, wage restraint and squeezing government waste. GCC government expenditure fell an estimated 7.9 percent last year in 2015 and a further 9 percent in 2016.