Non-oil sector on track in UAE

According to a new survey conducted in the UAE, its private non-oil sector is continuing to experience growth, in spite of plunging oil prices. However, it is anticipated business activity may drop or slow down during 2015.

According to January’s Purchasing Managers Index (PMI), international boost of orders attributed to increase in production output and employment rate. The PMI reached 59.3 in January, marking an increase of 0.7 from December’s PMI. The PMI calculates production output, spare capacity, prices and orders in order to represent the UAE’s non-oil based growth. The growth of the UAE’s non-oil sector is mainly attributed to the launching of new products, steady market and increase in sales.

The cost of production rose more sharply than the cost of finished products, since the increase in expenses (income and expenses of raw materials) hit the private non-oil based companies.

Increase in production and input expenses has not yet led to major increases in the cost of finished goods. On the contrary, decreasing commodity costs will possibly decrease inflationary issues and pressures. The UAE’s inflation rate is almost as high as it was in 2009 due to increasing housing and utility expenses.

During the previous month the IMF amended its forecasts concerning UAE’s economic growth reducing anticipated 2015 economic growth from 4.5% to 3.5%. The IMF expects that plunging oil prices will reduce UAE’s exports and consumers’ confidence.

However, Abu Dhabi’s non-oil based sector is anticipated to increase 5.5% during 2015. The percentage rate growth is significantly higher than its oil based sector, whereby the IMF anticipates will increase by 0.5%.

The significant decrease of oil price from US$110 per barrel during the last months of 2014 to $50 per barrel will inevitably influence oil dependent countries throughout the GCC.

UAE’s government spending and 2015 Budget is anticipated will remain steady due to its large government foreign asset and currency reserve wealth funds. The UAE’s reserves amount to approximately 400% GDP, in comparison to its expected 2015 financial deficit of 3.7% GDP.

Plunging oil prices will possibly influence the demand for imports from the UAE’s trade partners, which inevitably will negatively influence the country’s growth rate.

Nonetheless, the fact that business activity boosted in the beginning of 2015 is promising, although it is anticipated business activity will slow down as the year unfolds due to decreased oil prices and lower demand from significant export markets throughout the Gulf.

Generally, the UAE’s decreased growth concerning its oil-based sector will be counterbalanced by Dubai’s significant growth in non-oil based sectors. In spite of this, inflows to the emirate will be significantly influenced due to plunging oil prices. During 2015, business activity is anticipated will slow down but no alterations in consumption behavior is projected.

According to Saudi Arabia’s PMI, its figure remained constant at 57.8, revealing economic growth due to increased orders. Egypt’s January PMI dropped to 49.3, revealing output slowed down. This is the fifth time Egypt’s PMI figure dropped lower than 50 since Hosni Mubarak was removed in 2011.