Kuwait's overall GDP will decrease by 0.6% in 2014 due to a projected fall in oil production, before rising by 3.1% in 2015, according to forecasts by the National Bank of Kuwait. In its report issued today, it noted that non-oil growth in the Kuwaiti economy is set to reach 4.5% in 2014 and 2015, from 4% in 2013. Inflation is expected to rise from 2.6% in 2013 to 3% in 2014, and 3.5% in 2015. " High oil prices, large fiscal and trade surpluses, and the government's vast financial reserves continue to provide a positive near-term backdrop for the Kuwaiti economy. Although the headline rate of economic growth will look weak in 2014, this is entirely driven by cuts in oil output; non-oil growth, while far from firing on all cylinders, is forecast to improve slightly to 4.5% thanks to better project execution and continued strength in the consumer sector. "Both of these factors could disappoint, however, resulting in softer economic growth than forecast. We expect gradual progress on much-needed economic reforms to boost private investment levels and improve the economy's longer-term performance." Said the report. It added that " The consumer sector remains an important growth driver, but there are signs that growth may be softening a little. Consumer credit growth has come off its peak (though remains strong), employment growth has eased, and the impact of earlier increases in wages and benefits may be fading. Early figures also suggest that take-up of debt relief under the Family Fund law implemented in 4Q 2013 has been much lower than the KD 0.8 billion in loans applicable under the scheme. The boost to disposable incomes and additional lending will therefore be smaller than initially assumed." It further said " Following a brief cut in 1Q 2013, crude oil output rebounded to around 3.0 mbpd in mid-year, close to its full capacity. As demand weakens and non-OPEC supply continues to rise, we expect OPEC - including Kuwait - to cut output significantly in 1H 2014 in order to balance the market and keep prices close to 100 pb. Real hydrocarbon GDP is seen falling by 4% in 2014 before registering a small rise in 2015. " The report went on to say that " Despite continued strength in the consumer sector, inflation remained low through 2013, averaging 2.7% in the first 10 months. This was in spite of a pick-up in housing rent pressures, which were more or less offset by decelerating inflation in the food segment. Inflation in the remaining segments - sometimes thought of as 'core' - reached just 0.7% y/y in August, its lowest for years. Some upward drift in inflation is seen in 2014, as core pressures rise and food price inflation stabilizes. But inflation should remain in the 3-4% range over the next two years." It added that " The budget is set to record another huge surplus in FY2013/14, at 22% of GDP. This is slightly down from the 25% of GDP recorded a year earlier. Oil revenues are expected to dip slightly on softer oil prices while spending posts a small rise of 4%. Comments from senior government ministers in late 2013 about the need to control growth in subsidy payments suggest that the government will maintain tighter control of spending in future, compared to the 15% average annual increase seen over the past decade. So long as oil prices remain high, this will limit the decline in the surplus going forward." It continued saying that " A similar moderation is likely in Kuwait's giant current account surplus, due to a combination of peaking oil receipts and rising imports. But the surplus will remain above 30% of GDP. " The report further explained that " Improvements in the broader economic climate have been reflected in financial conditions. Deposit and credit growth have generally accelerated, spurred on by low interest rates, comfortable liquidity conditions, a buoyant consumer sector and better business confidence. Meanwhile, corporate profitability has improved and the stock market has held on to the advances made in 1H 2013. We expect further steady improvements in the financial climate in 2014; though acknowledge the uncertainties for global markets and liquidity related to the US Fed potentially reducing the size of its monetary stimulus early in the year (so-called "taper"). " Annual growth in broad money (M2) averaged 10% in the first 10 months of 2013, up from a 7% average in 2012 and consistent with decent growth in the broader economy. Growth in the more volatile short-term measure, M1, has been much stronger - helped by the low interest rate environment. Private sector deposit growth has provided further evidence of improved economic activity, accelerating to 10% y/y in the first 10 months of 2013, up from 6% through 2012. Overall liquidity conditions would have been stronger still were it not for government deposits, which have dipped following a surge in 2012. " Growth in private credit accelerated to 8% in October 2013, its fastest for more than four years. The improvement has been driven by a pick-up in lending to industry, particularly the real estate and oil sectors. Although this may partly reflect some one-off factors, we see it as supportive of our view of a pick-up in business sentiment more generally. Moreover, stronger lending growth has come despite a slight easing in consumer sector borrowing. The latter, although still very strong at 17% y/y, may soon be affected by implementation of the Family Fund law, which could see around KD 0. 4 billion in household debt - 4% of the total - acquired by the government. " Growth in commercial bank assets has also improved slightly, reaching 10% y/y in October, supported by stronger credit conditions. Private sector credit accounts for the majority of all bank assets. The rise in foreign assets - which had been a driving force behind bank balance sheet expansion since 2011 - abated in 1H 2013. This could suggest that banks were utilizing funds overseas in the absence of better domestic lending opportunities, which are now materializing. " The Central Bank of Kuwait (CBK) has maintained its main lending rate, the discount rate, at 2.0% since October 2012. The benchmark deposit rate - the one-week repo rate - has remained at 1.5%. Banks' weighted commercial lending rates drifted 20 bps lower to 4.6% through 2013 as the impact of the CBK discount rate cut filtered through the system. Meanwhile, the Kuwaiti dinar remained more or less unchanged against the US dollar in 2013, and by extension fell by around 3% against the strengthening euro. " The 7-month rally in the Kuwait stock market subsided in mid-2013, but equities managed to hold onto most of their earlier gains. Despite the leveling off, the main price-weighted KSE index was still up by 31% in the year to mid-December, while the value-weighted index was up a more modest 10%. The quieter domestic political environment, optimism on project implementation and the Syrian crisis were among the key factors affecting the market during 2013.