Economic environment

The International Monetary Fund (IMF) sums up 2017 as a tumultuous year marked by natural disasters, geopolitical tensions, and deep political divisions within and among many countries. Cause for optimism remains; however, particularly on the economic front, with GDP continuing to accelerate over much of the world in the broadest cyclical upswing since the start of the decade.

Faster growth is reaching roughly two-thirds of the world’s population, although incomes declined in about a quarter of emerging markets and developing economies. Boosted by a recovery in investment, global trade growth rebounded from its slowest pace since 2001, other than during the recession of 2009. Weak capital spending in the energy sector had been an important contributor to the weakness in global investment in 2016. Metal and fuel prices were supported by stronger momentum in global demand, as well as supply restraints in the energy sector, including hurricane-related stoppages in the United States, financial disruptions in Venezuela, and security problems in regions of Iraq.

Equity valuations continued their ascent to near-record highs, as central banks maintained accommodative monetary policy settings amid weak inflation. This was part of a broader trend across global financial markets, where low interest rates, an improved economic outlook, and increased risk appetite boosted asset prices and suppressed volatility.

Global economic outlook

Global GDP growth in 2018 is expected to increase to 3.9 percent from 3.7 percent in 2017, aided by robust US market growth, as well as by surprise upside growth in Europe and Asia. Factors supporting growth in the US, which is expected to exceed 2.5 percent next year, include falling unemployment, increased consumer spending, business confidence, and the macroeconomic effect of reducing corporate taxes.

Despite tensions over 2017 arising from Brexit and Catalonia, Eurozone growth is expected to maintain momentum due to increasing domestic demand as well as robust external demand, and is projected to reach 2.2 percent in 2018. Brazil and Russia are expected to continue their emergence from recessions in 2016 and post growth of slightly under 2.0 percent.

The Asia-Pacific region leads all regions at approximately 5.5 percent growth projected for 2018, despite a slight deceleration in economic growth in China (6.6 percent in 2018 versus 6.8 percent this year), as tightening financial conditions lead to a correction in real estate markets. India’s economy is expected to achieve strong growth of almost 7.5 percent next year, as economic reforms attract foreign investment.

UAE economic outlook

An improved UAE economic outlook is expected next year, with economic growth forecast to more than double in 2018 – from 1.3 percent to 3.4 percent – due to benefits from an expected recovery in oil exports. Factors underpinning the improved forecast include the sustained increase in crude oil prices, the effect of the acceleration of world trade on the diversified UAE economy, tourism receipts, and increased investment ahead of Expo 2020.

One of the key challenges in 2018 will be the effect on household incomes of the GCC-wide 5 percent Value-Added Tax (VAT). The implementation of VAT is expected to feed into higher inflation across the region, with UAE inflation next year forecast to rise to around 4.0 percent from approximately 2.5 percent in 2017. In terms of major risks, the UAE’s large reserves and strong regional competitive position are expected to insulate the country against major economic impacts from external events, but a scenario involving the escalation of regional tensions could hinder investment and economic growth.

Crude oil outlook

Crude oil markets strengthened considerably as a result of declining stocks, favourable global economic conditions, perceived geopolitical risks to supply, and supportive financial conditions. The outlook for 2018 expects a continuation of positive global economic conditions, a steady increase in world liquids demand, and tightening supply-demand balance. Global oil demand growth is expected to increase from 1.8 million bpd in 2017 to approximately 1.9 million bpd in 2018. Significant demand growth contributions are now coming from the Organisation for Economic Co-operation and Development (OECD), which is adding to typical rapid growth in developing country consumption. The Organization of the Petroleum Exporting Countries (OPEC) decision, to extend market intervention to the end of 2018, will be a key factor supporting oil prices next year.

Supply-side considerations potentially exerting downwards pressure on price would include: the agility and ability of the US shale industry to increase supply at attractive prices; compliance with production cuts slipping among OPEC producers while Brent remains above US $60/bbl; and additional non-OPEC supply momentum from Canada and Brazil, among others.

Refined products outlook

While global refining margins were buoyed as a result of the refining capacity temporarily taken offline by hurricanes and other events in 2017, margins next year are expected to temper somewhat from current levels as increasing product demand is offset by moderate inventory levels and capacity additions in the Middle East and Far East. Refiners’ margins in the US are expected to remain supported by product export opportunities into Latin America; European margins are buoyed by tightening fuel oil supply; and margins in Asia will be sustained by strong product demand growth.

The addition of new refining capacities east of Suez may put pressure on Middle East refining margins to some extent in 2018, and margins are expected to be slightly lower than in 2017.