KUWAIT CITY: Non-oil growth in 2018 has been downgraded to 3 per cent from 4 per cent before, and is weaker than the 3.5 per cent now expected for 2017, said the National Bank of Kuwait (NBK) in its latest Economic Update. NBK’s forecast for GDP growth in 2018 has been revised down to 3.5 per cent from 4.0 per cent before. This will still be a pickup from the 1.2 per cent expected for 2017, with the rebound driven by the start-up of the long-delayed Barzan gas project, which could boost real hydrocarbon sector GDP by 4 per cent. Given the scope for further delay at Barzan and the potential for an intensification of the diplomatic dispute, the risks to NBK’s growth forecast are on the downside, the Update said. The initial shock to the economy from the dispute which started in June has passed, with imports returning close to pre-crisis levels, new trade routes established and capital flows more stable. But the economy remains under pressure. Corporate earnings have been hit, equity and real estate prices have slumped, and the more difficult funding climate has put strain on banks and the currency peg. Although trends are obscured by data issues, NBK’s view is that the flow of people and tourists into Qatar has also been significantly affected. The resident population was up 3 per cent year-to-date in November, compared to 7-11 per cent in the equivalent period in the previous five years. Population growth slipped to just 1.7 per cent y/y, the slowest since 2011, though has been trending down for the past few years. Visitor arrivals were down 32 per cent y/y in October, and down 74 per cent y/y from the GCC. This weakness is likely to persist unless a resolution to the crisis is found. More positively, the government’s main source of revenues oil and gas receipts has recently bolstered its finances by the sale of stakes in various overseas firms. Activity is also cushioned by the long pipeline of infrastructure projects to which the authorities are committed both for the World Cup in 2022 and Vision 2030, including the metro (due 2019), Lusail Light Rail system (2020)and World Cup stadia. Meanwhile, there are plans to restart development of North Field gas deposits following the lifting of the 12-year moratorium, though the impact will likely fall beyond our forecast range. The latest 5-year development plan (2017-22) is being finalized. Low in 1H 2017 fell in to negative territory in August and September for the first time since 2011 and is estimated at 0.4 per cent for 2017 as a whole. Key to weak price pressures has been the slump in the housing component, at -5.4 per cent y/y in October, driven by the broader correction in house prices which has arguably intensified since the summer. But ‘core’ inflation is also low, estimated at 0.8 per cent for 2017 due to the still-strong currency (linked to the dollar peg) and weaker growth climate. Although food prices have risen due to the diplomatic dispute, the rise has not been as severe as feared. A VAT was intended to be implemented (likely late) in 2018, which would add around 2 per cent to the annual rate of inflation for one year. This is factored in to our forecast, but given the absence of preparations so far, the current need to support the economy and the manageable fiscal deficit, there is a good chance that implementation will be postponed. With base effects likely to push food inflation higher, the fading of downward prices pressures from the exchange rate and possibly VAT in 2H, NBK forecasts inflation to pick up to 2.5 per cent in 2018.