The GCC economy is set to grow steadily between now and 2020 but at a faster rate than the global average, according to a new report by the Economist Intelligence Unit.

The Gulf states will achieve average annual growth of 4.5 per cent compared with the aggregate global rate of 3.3 per cent.

And the report – The GCC in 2020: Outlook for the Gulf and the Global Economy – predicted that the region's economy will be worth $2 trillion (Dh7.2trn) in the next 11 years.

The GCC's main exports – oil and gas – are expected to grow in volume.

"GCC oil and gas production capacity is rising, and could rise much further by 2020," said the study. "Yet this key resource is likely to be managed in a different way.

"One likely trend is that the GCC will be seeking to export a smaller proportion of its oil as crude – a low-value-added commodity that offers few employment opportunities.

"Instead, GCC states will aim to turn more of their oil into refined products or petrochemicals, and to use their oil and gas resources as feedstocks for industries that will add more value and provide more jobs."

The volume of goods traded is likely to grow as new industrial projects, such as petrochemicals, aluminium and other resource-based industries, come onstream.

The difficult international financing environment in 2009-2010 means that some of the planned projects will be delayed, postponed or cancelled, but the region's demographics suggest it will remain attractive to investors and lenders in the medium term, it added.

Going forward, "we will also see more eastward movement of GCC exports and an increase in bi-lateral trade," said the authors.

"The share of GCC exports that go to Asia is almost universally expected to increase. Even if there were no policy moves to foster greater eastward trade, projected economic growth rates for key Asian markets (barring Japan) are higher than for more developed economies. This is likely to fuel greater increases in demand for imports."

Moreover, since industry will be a key growth area for these economies there will be a particularly high demand for the fuel, industrial chemicals and plastics produced by the GCC.

Takeru Hosoi, Associate Professor in the Faculty of Economics at Kokugakuin University in Japan, said in the report: "China will be the key trading partner for the Gulf in 2020, both for exports and imports."

And Alastair Newton, Managing Director and Senior Political Analyst at Nomura International told the authors: "Strong historical and cultural ties with India, as well as contemporary economic ties, would benefit trade links in both directions, while commodity rich Indonesia is another promising source of imports for the GCC."

Another expert interviewed for the report agreed that India and China would be increasingly important trading partners, but also points to the potential for growing regional trade.

He added: "Intra-Arab trade will expand rapidly, helped in large part by the new rail network, but also by increased links forged by migrant Arab workers, who will form a larger part of the GCC expatriate labour force."

Inward investment is likely to be concentrated in the export-oriented industries outlined above and in services sectors that cater to the growing resident population, including power, water, transport, education and healthcare, according to the report.

Hosoi said: "Petroleum and petrochemicals are the GCC's most competitive industries but the shortage of infrastructure in the region, particularly related to water and power, make this another key investment sector."

Visible goods trade will also remain very important to GCC economies and the Gulf will remain the key maritime shipping route, although rail links will also open up new routes, said the authors.

New developments in the region will greatly contribute to this. In particular, the Saudi Landbridge railway will sharply cut the time taken to transport goods from the Gulf to the Red Sea. The Friendship Bridge, a planned high-speed rail and road link between Bahrain and Qatar, is scheduled for completion in 2013.

This may be joined by other rail links among GCC states, which would facilitate intra-regional trade. A rail link to Turkey has also been proposed in the long term. Such developments will boost trade.

Finance, another important sector, is also expected to make a major contribution to the region's economy.

The report said the GCC is likely to become a regional financial hub by 2020, with a similar status within the Middle East as that of Singapore within Asia. However, it will be difficult to challenge the more established centres of New York and London.

Islamic finance is one area where significant growth is expected. Majid Dawood, CEO of Islamic finance consultancy Yasaar, said in the report: "This could lead to the region becoming a hub for the sector internationally."

Despite the increasing participation by nationals, the financial sector will continue to depend on expatriates. The mobility of this talent could be a concern.

Over the medium to long term, the GCC may need to step up efforts to retain this talent and develop its own sources. While other financial centres also utilise high levels of expatriate talent, cities such as London or New York offer workers a better chance of gaining citizenship and of building a permanent life for their families.

The GCC is expected to develop into an important centre for technology.

"The region will provide platforms for research and development, open new research centres and develop new seed and irrigation technology that is suited to an arid climate," said one of those interviewed.

The GCC states will also make increasing efforts to promote health and education tourism although, for the foreseeable future, these will be dominated by domestic demand.

The quality of tertiary education is perceived to be improving but wholesale improvements will depend on reforms at the primary and secondary levels, which will be a long-term process. Ultimately, though, GCC universities will be promoted by foreign students, and this will play a role in deepening foreign relations.

The report is positive about the scope of public-private partnerships in sectors such as transport, healthcare and education.

"Foreign participation in education may slow following a surge in recent years, as universities pause to assess the success of recent entrants. Some institutions will also be deterred by concerns about political constraints and censorship of the press and the internet in parts of the GCC."

On the outward investment front, the GCC's sovereign wealth funds (SWFs) will remain important players, but the extent to which they grow will depend crucially on the future trajectory of oil prices, as well as on their own investment decisions.

"GCC SWFs have built up sizable assets as a result of the recent oil boom, even allowing for mark-to-market losses in the past year. A lower oil price suggests the rate at which these funds accumulate capital will slow. One interviewee predicted that some countries would make net withdrawals from their SWFs by 2020."

"Governments will face competing pressures over how to manage these funds. Notably, they will need to balance the desire to increase returns and diversify their income streams, against the need to conserve assets for future generations.

"It is noteworthy that the SWFs have behaved cautiously during the 2008 downturn, defying predictions that they would make extensive, opportunistic acquisitions at low valuations. Over time, though, they will gradually become prepared to take on more risk."

Over time there will be a pressing need for them to invest in their own region to help offset the impact of falling foreign investment and tight international credit markets.

At the same time investment opportunities within the GCC will be limited in the short term and SWFs will want to ensure that their assets are geographically diversified in order to hedge against possible domestic downturns.

Thomas Mattair, a US-based business and government consultant at the Middle East Policy Council, was quoted as saying: "There is a limit to how much the region itself can absorb."

And Gerd Nonneman, Professor of International Relations and Middle East Politics at the University of Exeter Institute of Arab and Islamic Studies, said: "The development of SWFs should be seen as part of the overall GCC diversification strategy.

"When SWFs do make investments abroad, they are unlikely to agitate for change. GCC countries are likely to remain largely passive investors overseas as they do not have the inclination or the personnel to start running foreign companies."

The wariness and protectionism that some countries have exhibited towards SWFs is likely to moderate, at least in the early part of the forecast period, as capital becomes more difficult to obtain from other sources.

Yet while Western countries may place less of an emphasis on calls for SWFs to become more transparent, domestic pressure for greater transparency around SWF strategies may increase following reports of losses in 2008, said the report.