Dubai’s economy began to shrink last month for the first time since 2010, according to a survey.
The Dubai Economy Tracker, a monthly assessment of business activity in the emirate provided by Emirates NBD, recorded a score of 48.9 last month. Any score below 50 indicates that the economy is contracting.
This is the first month since the data series began in 2010 that the index has slipped into negative territory. Official GDP data lags by up to a year, meaning that policymakers are forced to look to informal indicators of economic growth to gauge the state of the economy.
Jason Tuvey, an emerging markets economist at Capital Economics, said monthly PMI data ought to be received cautiously.
“The PMIs aren’t always the best indicators of economic activity – particularly when it comes to scores below 50,” he said. “I expect that the Dubai economy is still expanding – it’s just clearly doing so at a much slower pace.”
But he agrees that the economic outlook for Dubai has worsened amid a strengthening dollar, low oil prices and a collapse in trade that has hit emerging markets worst of all.
“There are obviously concerns about the health of the global economy recently. Dubai as a logistics and trading hub could be hit because of that,” he said. “It is challenging times for Dubai’s economy, both as the Gulf slows and amid concerns about the slowing global economy.”
Although the Dubai Government earns very little of its income from hydrocarbons, it is still susceptible to changes in the oil price as regional governments cut spending, slowing local economic activity.
The Baltic Dry Index, a measure of freight costs that changes with the demand for trade, has fallen by 70 per cent since the middle of last year, which analysts believe to be due to a collapse in demand for shipping.
Container volumes at DP World, the UAE freight and logistics company, grew by 2.4 per cent last year, as global trade slowed – down from 8 per cent growth the previous year.
Trade volumes tend to pick up when oil prices are low but that has not happened so far – instead, a collapse in global demand for commodities has hit logistics companies in the emirate.
The US dollar, to which the dirham is pegged, appreciated by about 20 per cent since the middle of 2014. That has pushed up Dubai’s housing prices and made the emirate a less attractive destination for tourists.
Occupancy rates, average room rates and revenue per available room – three key measures of tourist activity – all fell in Dubai in the year to January, according to data reported by Zawya.
Dubai hotels should expect occupancy rates to fall to between 70 and 75 per cent this year, down from average occupancy of 77 per cent last year, Deloitte said in a recent report.
The UAE cut public spending by 21 per cent in the year to last September, the last period for which Ministry of Finance data is available. Saudi Arabia also announced spending cuts in this year’s budget. Cuts to public spending are expected to increase the severity of the downturn, economists believe.
“Although austerity is well under way and will slow economic growth, that’s a process that will take place over a long period of time.
“It’s going to be a case of growth slowing and not a case of the Gulf economies collapsing,” Mr Tuvey said.
“Uncertainty about global economic growth, volatility in financial markets and low oil prices have weighed on sentiment and activity, while tourism and retail trade has also been affected by a strong US dollar,” said Khatija Haque, the head of Middle East and North Africa research at Emirates NBD.
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