The Middle East is at the epicentre of five megatrends reshaping the world over the next few decades. These are: demographic and social change, shift in global economic power, rapid urbanisation, climate change and resource scarcity, and technological breakthroughs, according to global professional services firm, PwC.

In its report “Middle East megatrends: transforming our region”, PwC says that the five megatrends are creating new realities in the Middle East. Mr Hani Ashkar, PwC Territory Senior Partner, Middle East, said: “Our ‘new normal’ era of low oil price and squeezed liquidity has therefore created the impetus for urgent action.”

The report says that governments in the region know they need to cut subsidies, expand their fiscal base and bring private investment and corporate practices into state entities. They also know they need to keep building infrastructure, enable technology and innovation and start producing the right kind of graduates to drive productivity growth.

Demographic and social change

The Middle East will see its population rise almost 50% over the next 25 years. The rapid population growth has meant that the region is young, with over 40% of people under 25. Reaping this demographic dividend, will depend on those people being in meaningful work and that means revamping education systems to teach relevant skills, creating sufficient jobs, bringing women into the workforce, expanding the role of the private sector and diversifying the economy.

If the Middle East is able to do this, it could enjoy several decades of solid growth. If it is not, it can expect low productivity and rising levels of joblessness and instability. Already youth unemployment is among the highest in the world at an average of 28%.

In addition, by 2050, the age pyramid will have shifted significantly. Elderly nationals are expected to make up over 20% of the GCC population (compared to just 2% now). The challenge (and opportunity) then will be finding sustainable ways to handle pensions and to tackle the healthcare issues of an ageing population that already in its youth has one of the highest levels of obesity and diabetes in the world.

Shift in global economic power

Global economic power has shifted with Asia, Africa and Latin America now accounting for more than half of global GDP and rapidly rising trade and investment flows between these markets. Global economic power has become multipolar. This shift has placed the Middle East at the centre of many fast-growing markets, with a location that is between Africa and India, but also on the newly emerging Silk Road between China, Central Asia and Europe. Changing trade patterns are evidence of a pivot to Asia, but also to Africa and Latin America. A growing number of Middle Eastern companies are now investing heavily in these markets.

GCC economies rely heavily on expatriate workers, who have accounted for much of the population growth and make up the bulk of the population in the UAE and Qatar and a third even in populous Saudi Arabia. The private sector in most GCC countries is heavily dominated by expats. Rising unemployment and the need to streamline inefficiency in public sector organisations means governments are focusing on getting citizens into the private sector, which is causing tensions especially in companies that have built themselves on low-cost expat labour.

The end of the sanctions regime in Iran may see many investors redirecting their attention to this large market. The likes of Saudi Arabia and Egypt have taken steps to improve the governance, transparency and accessibility for foreign investors to mitigate this.

Rapid urbanisation

The Middle East has seen the fastest growing urban populations in the world for the past 50 years and longer. As a result, over 70% of people live in urban areas across the region, bringing it to the level of Europe.

The focus now is on how to make urban spaces function optimally so they add to quality of life and productivity rather than becoming centres of crime and instability. The region still needs significant progress in schools, healthcare facilities, public transport, pollution control, police forces and so on. Many cities are struggling to manage populations that have doubled within the past two decades and are still growing.

Climate change and resource scarcity

In PwC’s most recent global CEO survey, executives in the Middle East were among the least concerned by the impact of climate change and resource scarcity. The reality, however, is that changing the way humans use the planet’s resources will impact the GCC countries more than most. GCC countries are among the world’s highest users of energy and water per capita. The region’s economies rely heavily on revenues from fossil fuels and its rain and groundwater resources are depleting.

There has been a flurry of initiatives to cut subsidies on fuel, electricity and water and to ensure the region catches up in solar energy, and so has a chance of sustaining its status as an energy hub regardless of decarbonisation over the course of this century.

Water will become a significant challenge in the coming decade. Peak water consumption is forecast to grow by a third in the next five years and, with groundwater depleting rapidly, the GCC relies on desalination for around 70% of its water. The consequences are already being felt: marine salinity has increased significantly, affecting environment and fish stocks; agriculture and food security is being outsourced to other countries.

Technological change

In PwC’s latest global survey, 85% of CEOs in the Middle East agree that technological change will be the most transformative of the global megatrends over the next five years.

That reflects strong awareness of the high penetration of consumer technology and its obvious impact – everyone cites the revolutionary use of social media in the Arab Spring in 2011 – but also the recognition that most companies and government entities are struggling to develop digital strategies to leverage this potential.

Businesses are lagging in terms of digital innovation, research & development and the development of new technologies. E-commerce is still small, with most transactions that start online closing offline.

A number of public sector initiatives are underway to tackle this trend, including new universities and the creation of innovation zones. The Middle East still needs to focus on removing the bottlenecks at all stages in the value chain – education, incentives, legal framework, financing, entrepreneurial support and commercialisation.