Non-oil growth on track in UAE private sector

Increased orders from abroad led to growth in output and employment in the UAE in January, according to the monthly PMI Index from HSBC and compiled by Markit.

Shoppers at Dubai Mall. The headline PMI figure for the UAE rose to 59.3, up from 58.4 in December. Jeffrey E Biteng / The National

Growth in the UAE’s non-oil private sector continued apace in January despite lower oil prices, but slower activity is likely this year, according to a new economic survey released.

Increased orders from abroad led to growth in output and employment, according to the monthly Purchasing Managers Index (PMI) from HSBC and compiled by Markit, which polls the country’s business leaders.

The headline PMI figure for the UAE rose to 59.3, up from 58.4 in December. Scores above 50 indicate that the economy is growing. The index combines measures of output, prices, spare capacity and orders to provide a single snapshot of growth in the non-oil economy.

“Good market conditions, new projects and stronger sales growth” were driving the non-oil economy, the survey said.

Input prices continued to rise faster than the cost of finished goods, as raw material costs and higher staff costs hit businesses, the index showed.

This has not filtered through to higher prices for consumers, and falling commodity prices are likely to further reduce inflationary pressures. Inflation in the UAE currently stands near its 2009 peak, driven by rising housing and utilities costs.

The IMF last month cut the UAE’s economic growth forecasts by 1 percentage point to 3.5 per cent, predicting that lower oil prices would lead to reduced export earnings and decreased consumer confidence.

But Abu Dhabi’s non-oil sector was projected to grow at 5.5 per cent in 2015 – considerably faster than its oil sector, which the IMF said would experience growth of 0.5 per cent.

The fall in oil from prices of around US$110 per barrel in the third quarter of last year, to less than $50 per barrel last month, is bad news for the hydrocarbon-dependent economies of the GCC.

But sizeable foreign currency and asset reserves held by the UAE’s sovereign wealth funds mean that the country should be able to hold government spending steady. The UAE holds reserves equivalent to around 400 per cent of GDP, compared to a projected 2015 fiscal deficit of 3.7 per cent of GDP.

The lower oil price is likely to hit demand for imports from the UAE’s main regional trade partners, which may weigh on growth this year, the IMF said.

“The pick-up in activity at the start of the year is encouraging,” said Simon Williams, chief economist for the Mena region at HSBC. “But we continue to expect activity to lose speed into 2015 as low oil prices and weaker demand from key export markets in the Gulf weigh on momentum.

“Gulf oil producers are still outpacing the rest of the emerging markets, but recovery for troubled North Africa remains elusive,” he said.

Dima Jardanaeh, senior economist at EFG Hermes said that lower oil prices will likely take their toll on corporate sentiment in Abu Dhabi.

“For the UAE overall, low oil sector growth will be offset by high non-oil growth in Dubai. However, inflows into Dubai, especially from other GCC countries, will be impacted by lower oil prices,” she said. “There will be some kind of slowdown in 2015, but it will be marginal, and driven mostly by corporate sentiment, not by changes in consumption behaviour.”

Saudi Arabia’s score, also published, remained stable at 57.8, indicating economic expansion, as orders rose at a “marked and accelerated rate”, according to managers.

A plurality of Egyptian managers said that output fell in the first month of 2015, as the headline PMI figure fell to 49.3 – indicating a contraction in output last month. This is the fifth time that the index has slipped below 50 since the removal of Hosni Mubarak in 2011.

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