The drop in PMIs across the Gulf in July suggests that the pick-up in growth in non-oil sectors in the first half of 2019 has started to go into reverse. If oil prices stay low and fiscal policy becomes less supportive, as we expect, this slowdown has further to run.
Pick-up in the Gulf’s non-oil sectors appears to have run its course
- The drop in PMIs across the Gulf in July suggests that the pick-up in growth in non-oil sectors in the first half of 2019 has started to go into reverse. If oil prices stay low and fiscal policy becomes less supportive, as we expect, this slowdown has further to run.
- Starting in the Gulf, Saudi Arabia’s whole economy PMI – which covers the non-oil private sector – fell from 57.4 in June to 56.6 in July. This was the first decline this year. Meanwhile, the UAE’s PMI dipped for the second consecutive month, from 57.7 to 55.1.
- The breakdown of the data suggested that weaker activity was driven by softer domestic demand. The PMIs’ output components fell, as well as new orders. Meanwhile, external conditions were more mixed. In Saudi Arabia, the new export orders component reached its highest level since early 2017. In the UAE, however, the same component plunged.
- The PMIs suggest that the pick-up in non-oil sector growth across the Gulf in the first half of this year has now run its course. We expect that Brent crude will remain around its current level, ending this year at $60pb. This means that fiscal policy is likely to become less supportive over the coming months, weighing on the non-oil sector. We think that tighter fiscal policy will more than offset any boost from looser monetary policy as the Gulf economies follow the Fed in cutting interest rates.
- Elsewhere, Egypt’s PMI picked up from 49.2 in June to 50.3 in July, breaching the 50-mark which – in theory at least – separates expansion from contraction. The breakdown of the data showed that domestic demand strengthened in July as the output and new orders components rose. However, the headline figure doesn’t have a great relationship with the hard activity data.
- Price pressures in Egypt intensified last month on the back of cuts to fuel and electricity subsidies. The PMI’s input price component shot up from 51.4 in June to 58.0 in July. And the output price component hit a 10-month high. But after a temporary bounce in July, we still think that inflation will drop back over the rest of this year and that policymakers will resume their easing cycle. We’ve pencilled in another 200bp cut in the overnight deposit rate by end-2019, to 13.75%.
Chart 1: Whole Economy PMIs
Source: Emirates NBD/Markit
Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, email@example.com