New economic data suggests the weakening oil price is yet to take its toll on many businesses throughout the UAE – but that could change as the impact trickles down through the economy.
The UAE’s non-oil purchasing manager’s index rose to its highest level in six months in August as Ramadan’s end pushed up monthly figures.
The index, which aggregates managers’ views about the state of their businesses, rose to 57.1, up from 55.8 the previous month. Any score above 50 indicates that the economy is expanding.
Output grew to 63.1 last month, up from 60.0 in the previous month. Total new orders rose to 61.3. Of these, export orders fell to 54.4. That reflects the impact of the stronger US dollar and dirham, which have made UAE-produced goods more expensive to foreign buyers.
Backlogs grew to their highest level since the indicator was first released in September 2012. Output prices fell somewhat even as input costs rose, driven by higher salaries and purchasing costs.
“In the short term, it looks like after a slow start to the year, the UAE economy has picked up. This corresponds to the hard data we’ve seen recently – airport data and non-oil trade have both picked up,” said Jason Tuvey, an emerging markets economist at Capital Economics. “Slowing growth hasn’t materialised so far because the UAE hasn’t cut back on capital spending and is under no pressure to do so – it has substantial assets in reserve.”
“But over a longer horizon, growth will begin to slow as the impact of low oil feeds through to the real economy,” he said.
Khatija Haque, the head of Middle East research at Emirates NBD, said: “The sharp rise in the UAE PMI in August confirms our view that Ramadan likely contributed to the softer readings in June and July.”
“Encouragingly, new orders and output growth readings remain high, suggesting strong domestic demand,” she said.
Saudi Arabia’s PMI figures also showed a monthly improvement. Its overall PMI index recorded a score of 58.7, up from 57.7 in July, indicating continued growth in the country’s non-oil sector. Economic data released earlier this week showed that the kingdom’s economy grew by 3.8 per cent in the second quarter.
Ramadan took place between June 18 and July 17 this year, and usually hits economic data as reduced working hours and the hot weather dent productivity. PMI figures for June were the lowest since June 2013, when oil was trading at above $100 per barrel.
The outlook is likely to darken in coming months. The price of Brent crude on forwards markets fell to $42 per barrel at the end of last month as fears of a Chinese slowdown hit demand for oil. That is far below the UAE’s break-even price of $65 per barrel.
The IMF has downgraded its projections for UAE growth three times since the start of the oil price decline last year and says that planned government cuts to public spending will shave 1 per cent off the country’s growth rate every year up to 2020.
But the UAE should fare better than its neighbours, Mr Tuvey said.
“The UAE will be the outperformer in the Arabian Gulf in the coming years. It is more diversified than others in the Gulf – it has built itself up as a logistics and manufacturing hub,” he said. “For that reason, the economy is not as dependent on government spending as Saudi Arabia or other Gulf states.”
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