The challenge will be to sustain the momentum. Diversification plans have taken a leap forward on high oil incomes. 'In this boom, the governments - across the board - have not rested on their laurels,' says Standard Chartered Bank senior Middle East economist Monica Malik.

However, a drop in oil prices could make investors hesitant and slow the growth of the private sector. 'The main risk is to confidence,' says National Bank of Kuwait chief economist Randa Azar Khoury. 'There has been a lot of euphoria and private investor confidence is high. When people see oil prices come down, they have an excuse to sit on the side.'

At the root of the problem is a rebalancing oil market. Blaming mild winter weather in the US and readjustments in commodity markets, the International Energy Agency's revised figures published in January forecast global demand for oil this year to fall to 85.8 million barrels a day (b/d), a 160,000-b/d drop on the 2006 average. US crude prices fell in mid-January to a 20-month low of about $55 a barrel, down from a peak of $80 a barrel in the summer.

In response to the price slide, OPEC plans to cut production by 500,000 b/d from 1 February, trimming oil revenues further. But declining demand for oil appears to be a long-term trend. Rampant thirst for oil is moderating in Europe and the Pacific, but also crucially in the US, where debate about dependence on foreign oil has intensified and car-loving consumers are feeling the pinch. Consumers are belatedly adjusting to high fuel prices that have lined the pockets of Gulf producers.

The growth of the GCC as a bloc is set to slow in both real and nominal terms. After the feverish economic activity of the past four years, 2007 marks the beginning of a cooling off period. HSBC forecasts real GDP growth across the GCC will slow to 5.2 per cent in 2007 and 2008, down from a three-year peak of 7.1 per cent in 2006. Some states will be hit worse than others. In Saudi Arabia and Kuwait, real growth will reach a more restrained 4.5 per cent in both economies this year.

The rise in regional nominal GDP will also decelerate, reaching just over $700,000 million this year, where it is expected to hover until 2008, according to the bank's December figures. This is a far cry from the galloping pace of growth which saw nominal GDP leap by $142,000 million to $609,000 million in 2005 and then again by $100,000 million

the following year. By contrast, the 2007 increase is expected to be marginal and could even contract.

The private sector is still small and vulnerable to any downturn. Stock markets across the region are already languishing, undercut by a region-wide correction that has seen Saudi Arabia's Tadawul lose two-thirds of its value since February last year. The market is still in decline. Regional bourses continue to fall with no end in sight, contradicting strong company fundamentals and profit

reporting.

Instead, local and international money is still being ploughed into real estate, where private investors have taken the initiative usually reserved by governments to get projects under way. The shift away from public sector-sponsored projects to private ones is welcome, but too narrowly focused to give the entire private sector a lasting boost. Individuals will have to hedge their investment strategies to give other sectors the chance to develop.

'All that investment is happening in one sector - real estate, which is not going to help us in the long term,' says Bahrain Export Development Society chairman Yousef Mashal. 'We need to