Austerity to hold back economic recovery

The recovery in oil prices from their nadir in April has not prompted policymakers in the Gulf to row back on their plans to push through fiscal austerity. Saudi Arabia suspended the Cost of Living Allowance in June and also delayed or cancelled capital projects to try to rein in spending. And the tripling of the VAT rate in July caused inflation to jump from 0.5% y/y in June to 6.1% y/y last month. Elsewhere, Oman’s Sultan Haitham announced a government reshuffle this month, relinquishing his role as finance minister as part of a push towards correcting the dire public finances. Even if, as we expect, oil prices continue to rise over the next year or so, there will be limited scope for governments to loosen the purse strings and, as a result, economies recoveries will be weak.