War puts regional growth heads on the path to a contraction

It’s not all bad news for regional growth prospects this year, with windows of opportunity in sectors like AI offering a little light to offset the gloom cast by the conflict across our region. Globally, growth has only been shaved down to 2.5% from 2.6% at the start of the year.

Growth in our neck of the woods is likely to trail global averages, according to the World Bank’s latest Global Economic Prospects report (pdf). Output for the Middle East, North Africa, Afghanistan, and Pakistan region is now set to contract by 2.1% this year, reversing last year’s 3.3% of expansion.

Within the GCC, the effects will be starker, as economies are set for a 4.3% contraction, according to the World Bank. In January, it saw GCC growth coming in at 4.4% for this year. The UAE is set for a 1.6% contraction, a 2% is penciled in for KSA, and Qatar is starting down a 20.9% decline.

Surprising exactly no one, the war has been the biggest dampener of growth after it cut off the export route for one fifth of oil and LNG. Effects weren’t limited to depleted oil revenues, but put the brakes on other sectors that had been showing strong indicators of growth, like tourism, logistics, and aviation, while also weighing on business sentiment and food inflation.

There’s fragmentation within that picture as well: Alternative export routes for KSA, the UAE, and Oman helped offset some of the oil revenues losses. While on the flip side, oil-importing economies have managed to avoid much of the brunt faced by exporters, and are set to see growth rates increase to 4.3%, up from 3.9% last year.

Could AI be the saving grace? The World Bank sees AI as transformative, but notes a massive schism within the region when it comes to who is positioned to catch the upside as it stands (the UAE and KSA), and countries like Egypt, Morocco, Pakistan, and Tunisia, that are home to growing digital ecosystems and readiness gaps simultaneously. Lagging regulation and the current lack of Arabic-trained AI models also risk hampering the region from reaping the benefits of AI.

Regional cooperation on AI is the region's biggest, and yes most untapped, opportunities, according to the report, which sees pooling resources, compute capacity, and government frameworks as leading to a more broad-based benefit.

The outlook: Heightened uncertainty, higher interest rates leading to less financial space for regional entities, and inflationary pressure are all downside risks to watch out for. If the regional geopolitical situation stabilized by the end of the year, growth would rebound to 7.8% for 2027.

But that comes with a caveat: The World Bank flags that any such growth would be chalked down to restored oil exports rather than an uptick in productivity, stressing the need for better regional resilience to hedge against future crises.

MARKETS THIS MORNING-

Asian markets are having a mixed morning in early trading. Japan’s Nikkei opened lower, dragged down by tech stocks that tracked losses on Wall Street yesterday following disappointing revenue figures from OpenAI. The subdued sentiment on AI and tech is looking likely to carry through to the trading day in the US later today, with futures more or less flat.

THE CLOSING BELL-

The ADX fell 1.6% yesterday on turnover of AED 1.3 bn. The index is down 1.9% YTD.

In the green: Invest Bank (+3.7%) and National Bank of Umm Al Qaiwain (+2.8%.

In the red: Abu Dhabi Aviation Co. (-4.9%), Abu Dhabi National Takaful Co. (-4.7%), and Abu Dhabi Islamic Bank (-4.0%).

Over on the DFM, the index fell 1.7% on turnover of AED 658.7 mn. Meanwhile, Nasdaq Dubai was down 2.6%.