Bright growth prospects for UAE, KSA: Report

The economic growth in the UAE and Saudi Arabia ended the first quarter of 2014 on a bright note, according to the latest Crédit Agricole Private Banking research report, ‘Macro Comment – Eastern Promises: Menaa Update’.

“As oil-rich Gulf countries like the UAE and Saudi Arabia sign off the last quarter on a growth trajectory, it is interesting to note that the Arab nations of the Middle East are heading towards being two-speed economies again, with non-oil countries like Egypt and Lebanon registering less encouraging numbers. This fact is clearly evident from the Purchasing Managers’ Indexes (PMI) in March 2014”, said Dr. Paul Wetterwald, Chief Economist, Crédit Agricole Private Banking.

In the UAE, the PMI index mark improved slightly to 57.7 (from 57.3 in February). In Saudi Arabia, the headline PMI (non-oil private sector economy) retreated further (to 57 from 58.6 in February), but from a fairly high level. PMIs in both countries remained largely above the expansion/contraction frontier set at 50. Does this mean that the two countries are now prone to inflation?

Indications derived from the PMI index for the UAE signals some increases in raw material prices and salaries. Part of these increases translated into higher output prices.

In Saudi Arabia, March prices increases, be it in terms of output prices, input costs, or staff compensation, were muted. To make a link with the CPI evolution one has to remember that what weighs the most in the Saudi consumer basket are foodstuffs and beverages (26 per cent of total weight). Renovation, rent, fuel and water count for 18 per cent and transport and telecommunication 16 per cent. On its side home furniture represents 11 per cent, fabrics, clothing and footwear 8 per cent. Other categories are education and entertainment (6 per cent), medical care (2 per cent) and other expenses and services (13 per cent).

Given this breakdown it is worth to mention that expressed in US dollar terms, the FAO food price index is up 3.4 per cent in Q1 2014. Combining the effect of the currency movements and of the US dollar food price variation allow us to compute a yearly rate of change of the food price in the local currency, and then to compare it with the consumer price inflation (CPI).

Assuming that the current US dollar food price and exchange rate remain the same until September 2014 results in a yearly food price change which will be higher than the most recent change. This assumption is illustrated by the dotted line values between March and September 2014 in the graph below.

The positive difference between the current rate of food price change and the September one means that there will be no contribution to disinflation stemming from the food prices. The conclusion is obvious: the largest component of the CPI basket will inflate the Saudi CPI over the coming months.

Dr. Paul Wetterwald said the start of 2014 looks like a period of high and stabilizing nominal GDP.

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