UAE, Saudi Arabia private sector remains resilient

Private sector growth remains strong in UAE and KSA

Midway into 2015, despite oil prices being nowhere near their previous highs and economic growth forecasts downgraded, Saudi Arabia and the UAE have continued to record strong private sector growth and job creation.

In a new research report, Crédit Agricole Private Banking shows that UAE job creation has hit a 3-month high and that new orders have shown strong growth, reflecting in the non-oil private sector PMI (Purchasing Managers Index) expanding to 56.4 in May. This is just a small decline from 56.8 recorded in April. A PMI above 50 indicates expansion, while a number below 50 indicates a contraction in the industrial sector.

Another tracker from Emirates NBD, which studies only the Dubai economy, has also indicated a faster pace of growth in May, relative to April.

“Output, employment and new work indices all rose last month, with the output index reaching 57.6, well above the neutral 50.0-level that separates expansion from contraction. New work rose to 58.7 from 58.0 in April, but this is still a slower pace of growth in new orders than was seen in Q1 2015,” says Emirates NBD in a note.

Companies could be facing a margin squeeze, though, as input costs have been rising even though output prices have shown a slight decline.

“UAE is yet to fully feel the pinch of the lower oil price across its relatively diversified economy in comparison to GCC peers,” said Dr. Paul Wetterwald, Chief Economist, Crédit Agricole Private Banking. “Similarly in Saudi Arabia, output and new orders expanded, but the rate of growth and pace of job creation eased somewhat during the month. It was interesting to note that the Kingdom’s headline PMI last month (57.0) was at its lowest level since May 2014. Whilst the most recent data in the PMI series still depicts a growing non-oil private sector economy, our estimate of growth in Saudi Arabia is more conservative.”

IMF has projected growth in Saudi Arabia to stay around the three percent mark in the medium term, but to slow to 2.7 percent in 2016 as government spending adjusts to low oil prices. The body has also downgraded the UAE’s growth forecasts to 3.2 percent in 2015, 0.3 percentage points below its January prediction of 3.5 percent.

While growth slows down, the GCC is likely to benefit from low food inflation with the recent softening of world food prices, according to Crédit Agricole.  The FAO food price index in May 2015 is down 20.7 percent year-over-year and 1.4 percent month-on-month.

“Given the large weightage on food items in consumers’ baskets, this lower food price scenario will be positive for consumers in the GCC countries where most of the food requirements are imported from other places. This situation will prevail provided no strong El Niño episode occurs” Crédit Agricole said.