Growing Gulf. (Cover Story Middle East Economies)

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Despite potential political instability, the economic fortunes of the major Middle Eastern markets remain promising. Strong oil prices, comparatively healthy government finances and a movement towards economic liberalisation are set to make 2003 a year of growth.

On being asked an unforgiving question during a press conference in Cairo in February 1943, Winston Churchill replied: "I always avoid prophesying beforehand, because it is much better policy to prophesy after the event has already taken place." If Churchill was returning to the Middle East today, there is little reason to think that his position would have changed.

Most leaders in the Middle East will probably be starting the year in a similar frame of mind. Theirs is an uncertain world. The Israeli/Palestinian crisis continues unabated and, although there is no immediate danger of overspill, there are equally no signs of life in any peace process. Dominating more international headlines is the escalation of rhetoric in the US campaign against Iraq. The drums of war have been beating for nine months, and the momentum built cannot be sustained indefinitely. This year it will either explode into conflict or -- a scenario most analysts have neglected -- be naturally dissipated by the diktats of real politik (see box).

Such regional political issues provide one backdrop for the region's economic planners. The others come in the form of forecasts over the health of the global economy, with which the Middle East is becoming increasingly integrated, and the price of oil -- still the major source of revenue for many of the region's governments, despite attempts at economic diversification. Of course, the bundle of interrelated variables forms an impossibly complex economic equation. The result is that economic forecasting is less a science and more an art.

In its annual macroeconomic outlook, MEED is mainly bullish: 2003 will be a year of healthy economic growth. Its forecasts are based on the assumption that there will be no war in Iraq or, if there is a conflict, that it will be sufficiently quick, clean and well-managed for the disruption to business activity elsewhere in the region to be reduced to a minimum.

The other key assumption made is that OPEC is well positioned to react to volatility in the global oil market and soften market-fundamental -- as well as emotion-driven -- swings in the price of crude. This has not always been the case, as the most recent oil price crash in 1997/8 highlighted. But the improvement in relations between Riyadh and Tehran, the surplus production capacity within the group and reasonable internal coherence suggest the organisation will have the flexibility and the confidence to bring comparative calm and stability to the oil market.

The two jokers in the pack are the current political unrest in Venezuela - strike action against the policies of President Chavez has pulled significant supply out of the market in recent weeks, and no reduction of tension seems imminent -- and the Iraqi question. A multiplicity of hands could yet be dealt pushing oil prices in different directions, but most scenarios that …