The economies of the UAE and Saudi Arabia slowed further last month, according to monthly trackers of business activity published yesterday, as falling oil prices and a stumbling global economy hit the region.
The UAE purchasing managers’ index, which surveys businesses across the country, recorded a score of 52.6 last month. While any score above 50 indicates that the economy is expanding, this is the index’s lowest score since March 2012.
Saudi Arabia hit its second all-time low in two months as public spending cuts added to the effects of falling oil prices. It recorded a purchasing managers’ index score of 53.9.
The kingdom cut spending rapidly in the fourth quarter of the year, trimming its budget deficit from an expected 21 per cent of GDP to an actual 15 per cent of GDP. It plans to cut spending further this year.
The oil price has fallen from above US$110 per barrel eight months ago to about $30 now, hitting state budgets and spending in a region dependent on the government for growth.
"Today's data adds to mounting evidence that the impact of lower oil prices is starting to hit home," Jason Tuvey, the emerging markets economist at Capital Economics, wrote in a research note.
“Part of the slowdown in activity in January may reflect a deterioration in sentiment in light of the latest drop in oil prices. After all, the survey took place in the middle of the month, around the same time that oil prices fell below $30 per barrel.”
Khatija Haque, the head of Middle East and North Africa research at Emirates NBD, blamed the slowdown in the UAE on uncertainty about the economic outlook and low oil prices weighing on consumer and business sentiment. The strong dollar also continues to impact demand from emerging markets in particular.
The dirham, which is pegged to the dollar, rose about 10 per cent in real terms against the UAE’s trade partners, according to data from the Bank of International Settlements. That has pushed up prices of real estate in Dubai, further slowing growth in the emirate.
Meanwhile, the UAE Central Bank says that the economy grew by 2.8 per cent in the fourth quarter of last year, the slowest rate since 2010, when the country was emerging from the aftermath of Dubai’s 2009 real estate crisis.
The UAE government’s fiscal position worsened dramatically despite the public spending cuts, Central Bank data shows.
While the government has taken moves to cut public spending, the speed of the collapse in the oil price has outpaced reductions in expenditure.
The deficit widened to Dh19.1 billion, on the back of a 23 per cent fall in revenue.
Government spending fell by 9.9 per cent against the previous quarter.
Budget cuts have focused on cuts to infrastructure and subsidies. Spending on public sector salaries rose by 27.3 per cent in the third quarter against the year-earlier period.
The worsening outlook for the global economy – with Europe on the edge of deflation, the low oil price hitting US growth and China’s manufacturing economy slowing to a crawl – has economists worried that the region will suffer further in the coming year.
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