Gulf Growth Gains Amid Israel–Iran Strains

Gulf economies—led by the UAE and Saudi Arabia—are forecast to sustain stronger growth, underpinned by higher oil output and robust non-oil activity, even as tensions between Israel and Iran add volatility to the region's economic outlook.
Capital Economics estimates the UAE economy will expand by approximately 5.8 percent this year, propelled by elevated oil production and expansion in tourism, finance and construction sectors. The non-oil sector continues to account for three‑quarters of national output, demonstrating effective economic diversification and a supportive fiscal framework.
In Saudi Arabia, output has received a boost from OPEC+ adjustments. Riyadh, urging increased production, has reversed voluntary cuts of the past five years—liberating more oil onto global markets. This strategic move supports GDP growth, although economists caution it may obscure a weakening non-oil sector if public spending tightens.
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The Israel‑Iran confrontation has prised markets into cautious territory. Brent crude spiked above $78 per barrel before cooling slightly, driven by anxiety over possible supply shocks—from disruptions in Iran or through the Strait of Hormuz—though analysts generally see deep disruption as unlikely. Asian refiners, including in India, have shifted toward securing Middle East crude via term contracts, avoiding speculative premiums in spot markets.
The UAE's stock markets reflect this duality. Following earlier losses, the Dubai and Abu Dhabi indices rebounded—rising 1.6 percent and 1 percent respectively—as hopes of de‑escalation emerged, buoyed by diplomatic mediation efforts.
Nevertheless, Capital Economics warns that if the conflict deepens, Gulf growth advantages could erode. Iran's economy—roughly 0.85 percent of global GDP—might shrink by around 50 percent in a prolonged conflict, impacting trading partners; the UAE's exports to Iran alone represent 1.2 percent of GDP. A wider regional confrontation could trigger oil-price spikes, creating destabilising ripple effects.
Yet projections remain cautiously optimistic. Capital Economics outlines a scenario in which hostilities subside within weeks: oil prices normalise near $65 per barrel and Gulf GDP growth remains robust. Oxford Economics likewise suggests that even in more severe oil‑shock scenarios, the macroeconomic impact may be limited and manageable.
Longer‑term resilience in the Gulf is being supported by strategic diversification initiatives. UAE's efforts to expand non-oil industries through tourism, financial services and infrastructure are dovetailing with Saudi Arabia's Vision 2030—including privatisation of state assets and SME expansion to lift non-oil GDP share.
Nevertheless, analysts assert that non‑oil sectors in Saudi Arabia are showing signs of strain. Early signs of contraction coincide with public spending consolidation, even as oil revenues rise. UAE diversification, in contrast, has maintained momentum, with forecasts rising from 4 percent in 2024 to 4.5 percent in 2025 and 5.5 percent in 2026.
Region‑wide growth expectations have been revised upward—GCC economies are now seen expanding around 4.4 percent this year, a 0.4 point upgrade—driven by faster OPEC+ output and sustained non-oil activity in key states.
Despite these positive forecasts, cautious tones persist. Market volatility has increased across bonds, equities and currencies. A protracted conflict—which includes threats to Strait of Hormuz oil shipments—could have serious economic consequences.

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