Kuwait’s non-oil recovery continues; OPEC+ cuts weigh on oil sector GDP

Kuwait: Preliminary estimates published by the Central Statistical Bureau (CSB) for Q2 2024 show non-oil growth accelerating versus Q1, led by the manufacturing sector. Oil GDP growth, though, remained in negative territory, weighed down by Kuwait’s OPEC-linked production cuts. This has adversely affected headline economic growth, which came in at -1.5 percent y/y in Q2, better than Q1’s reading of -3.7 percent. The outlook for 2025 is broadly positive, supported by further steady non-oil sector growth and rising oil production as OPEC+ unwinds its voluntary cuts by year-end.

Non-oil activity expands

Non-oil GDP growth picked up to 4.2 percent y/y from 2.7 percent in Q1, the latter downwardly revised from 4.7 percent previously. Although these figures are also preliminary and subject to revision, sectoral data reveal that the expansion was led by robust growth in the ‘other services including real estate’ subcomponent (6.2 percent y/y) and the manufacturing sector (5.7 percent), in which oil refining has become ever more important as a contributor following the ramping up of crude refining at the Al-Zour refinery. Also helping was the less negative reading for the ‘taxes less subsidies’ adjustment. These gains contrasted negative growth in other sectors in Q2, including ‘public administration and defense’ (-2.4 percent y/y), the largest segment in the non-oil economy, telecommunications (-0.7 percent) and hotels & restaurants (-4.2 percent).

Overall, the non-oil economy appears to be finally recovering after two years of contraction (including -2.9 percent in 2023). Official growth averaged 3.5 percent in the first half of 2024, and while we are targeting full-year growth of around 2.3 percent, we think broad trends point towards a moderate acceleration in growth next year.

These include a potential recent bottoming-out of consumer spending growth, and pick-ups in bank credit, real estate and project awards. The commencement of monetary easing following the Central Bank of Kuwait’s 25 bps cut to the discount rate in September should also be positive for growth. Therefore, we see non-oil GDP growth rising to 2.6 percent in 2025. For Kuwait to realize greater non-oil output gains, potentially exceeding the pre-COVID annual average of 3.3 percent (2011-2019), we would look to execution of the government’s forthcoming economic reform agenda and to much higher domestic investment rates.

Oil sector remains in contraction

Oil GDP remained in year-on-year contraction territory for the fifth consecutive quarter in Q2 2024, weighed down by OPEC-linked crude production cuts and especially the additional voluntary cuts that Kuwait signed up to in May 2023. Growth clocked in at -6.8 percent y/y in Q2, easing slightly from -9.8 percent in Q1. In H1 2024, oil GDP was down 8.3 percent y/y, with Kuwait maintaining its crude oil production level at 2.413 mb/d, in line with its OPEC+ quota. Crude output is not expected to increase before January after OPEC+ agreed initially in September and then again in November to roll over the voluntary cuts amid global oil demand softness. From January 2025 onwards, according to the current OPEC+ schedule, Kuwait’s crude production will rise at a monthly rate of 11 kb/d to reach 2.548 mb/d by year-end. Oil GDP growth will turn positive in Q1 2025. In 2025, we expect oil GDP to rise by around 3.4 percent, assuming that OPEC+’s voluntary cuts are fully unwound.

Total growth to turn positive in 2025

In sum, although total GDP contracted at a slower rate (year-on-year) in Q2 than in Q1, it still recorded a sixth consecutive quarter of predominantly oil sector-linked decline. Economic growth should, however, turn positive in 2025, as the recovery in the non-oil economy gains momentum and as OPEC-mandated supply cuts begin to unwind. Downside risks to the outlook center on lower than anticipated oil prices, which could reflect weaker global oil demand fundamentals, and which could reduce oil revenues and perhaps induce the government to adopt a more cautious fiscal stance, while upside risks could be higher than expected oil prices and a confidence-boosting, more rapid roll out of economic reforms and investment.