Official GDP data for 2009 are not yet available, but unofficial reports suggest that real GDP contracted by 4.6%. We estimate that real GDP growth recovered to 2.7% in 2010, as imports contracted. Comments from the governor of the Central Bank, Sheikh Salem Abdel-Aziz al-Sabah, suggested that growth stalled in the second half of 2010, after a strong start to the year. However, higher oil prices and a small increase in production (of around 1%) supported growth in 2010.

We expect GDP growth to accelerate in 2011, as oil production picks up. Although there has been no change in the official OPEC production ceiling, Kuwait has followed the lead of Saudi Arabia and pledged to produce more oil to fill the gap left by cuts in Libyan production. The latest data from the International Energy Agency show that output rose in February and March. Growth in oil production is expected to continue in 2012 and beyond as Kuwait starts to produce closer to capacity and as new fields come on stream. We forecast that higher oil output coupled with steady growth in both public and private investment will lead to average annual GDP growth of 5.2% in 2012-15.

We estimate that growth in government consumption and fixed investment turned positive but was subdued in 2010 as the government's ambitious spending plans will only start to feed through to stronger physical demand from 2011. We expect both public and private investment to pick up more markedly in 2011. Recent legislation, including a privatisation law, designed to encourage private-sector investment in the economy, should gradually start to bear fruit. However, bureaucratic problems and tensions between the government and parliament are still likely to hamper the disbursement capacity of the state. With strong growth in investment, requiring an ongoing influx of expatriate workers and growth in population, we expect private consumption to grow steadily in 2011-15, at an annual average rate of 5.3%.

Export growth will track the expected increase in oil production in 2011-12. Import growth is forecast to rebound strongly in 2011-15, particularly in 2012-13, owing to increased spending on capital investment by the government and the private sector, in particular on large infrastructure and oil-related projects.

The non-oil sector is projected to remain relatively small, despite efforts to diversify the economy. The manufacturing sector will continue to focus on petrochemicals, meaning that its growth will remain tied to Kuwait's ability to increase oil output. By contrast, the services sector will provide more room for the growth of private enterprise. Kuwait is well placed to benefit from the resumption of investment in Iraq's oil sector, and we expect an expansion in the provision of financial services, logistics and telecommunications in 2011-15.

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