Solid growth on the cards for the UAE despite accelerating inflation

Recovery from the pandemic-related recession of 2020 set to continue, even as consumption is likely to slow

Dubai hotels have reported that their occupancy rates are at close to pre-coronavirus levels. EPA

The latest survey data for the UAE shows that the non-oil sectors are recording a sharp improvement in business conditions. The UAE’s purchasing managers’ index (PMI) rose to 55.6 in May, the highest reading since mid-2019.

The survey highlights strong growth in both business activity and new orders, with about 28 per cent of companies reporting an increase in business activity last month.

The story is similar in neighbouring Saudi Arabia, where private sector companies have also reported robust growth in new work and business activity in May.

For the most part, this was expected as the region’s economies continue to recover from the coronavirus-related recession of 2020. The UAE has also benefitted from the rebound in international travel and tourism, with Dubai hotels reporting hotel occupancy at almost pre-pandemic levels through to April, and passenger traffic through Dubai International Airport more than doubling in the first quarter of 2022, relative to a year ago.

We expect this trend to continue, along with increased investment to underpin growth over the course of this year even as the global economic backdrop is less supportive in the second half of 2022.

At the same time, the oil and gas sectors are expected to record double-digit growth this year on increased oil production, and headline gross domestic product growth in the UAE is set to be the highest in a decade in 2022.

Consumers, however, are starting to feel the pinch of higher inflation. Dubai recently released consumer inflation data from January through to April 2022, after rebasing the index and adjusting the weights of the various components in the consumer basket.

Inflation accelerated an annual 4.6 per cent in April, from 1.1 per cent in December 2021. The main driver of inflation in Dubai in recent months has been transport costs, which were up 28.8 per cent, year on year in April, accounting for about half of headline inflation.

Petrol prices increased by 13.5 per cent month on month, in June to more than Dh4 ($1.08) a litre for 95-octane, about 80 per cent higher than a year ago, which will be reflected in the official CPI readings in the coming months.

With crude oil prices remaining elevated and refining and shipping costs increasing as well, there appears to be little relief for consumers on this front.

Food prices have also risen sharply, up 8.6 per cent year on year in April, again largely a result of developments in global markets because of the war in Ukraine disrupting the supply of key agricultural commodities, as well as higher freight costs.

The only component of Dubai’s CPI basket that declined on annual basis in April was housing and utilities. This may sound counterintuitive, given the evidence of higher residential rents across freehold areas of Dubai, but it takes 12 to 18 months for changes in the market to feed through to the official CPI survey, because not everyone renews their leases at the same time, and not all areas and units experience the same rate of rental price increases.

Already the rate of decline in annual housing costs in the CPI has slowed and we expect this to turn positive in the coming months.

While the Federal Competitiveness and Statistics Centre has yet to publish UAE wide inflation data for 2022, we expect a similar trend to be evident at the national level.

Consumer inflation in both Kuwait and Qatar stood at an annual 4.7 per cent in April while in Bahrain, inflation has accelerated to 3.5 per cent in April, although this is partly due to a higher VAT rate that came into effect in January.

Certainly, the caps on petrol prices in other GCC countries could keep inflation more contained this year, relative to the UAE.

If there are no further global supply shocks that push crude oil, food and other commodity prices higher in the coming months, we expect consumer inflation to slow in the UAE in the fourth quarter, as a stronger US dollar helps to offset some imported inflation, supply chain disruptions ease and high base effects kick in.

However, inflation could remain higher than it was in the pre-Covid-19 era for some time.

Khatija Haque is chief economist and head of research at Emirates NBD