June’s PMI figures were robust across the Gulf, but we expect that activity will slow as oil prices falter and fiscal policy becomes less supportive. Meanwhile, subdued price pressures in Egypt mean that we remain comfortable with our view that the central bank will resume its easing cycle before end-2019.
PMIs hold up in the Gulf, but momentum is unlikely to last
- June’s PMI figures were robust across the Gulf, but we expect that activity will slow as oil prices falter and fiscal policy becomes less supportive. Meanwhile, subdued price pressures in Egypt mean that we remain comfortable with our view that the central bank will resume its easing cycle before end-2019.
- In the Gulf, Saudi Arabia’s whole economy PMI – which covers the entire non-oil private sector – edged up from 57.3 in May to 57.4 in June. (See Chart 1.) This was the highest reading since late 2017.
- The rise in the PMI adds to the evidence that Saudi Arabia’s non-oil sector has strengthened since the start of this year. Recent GDP figures showed that non-oil growth hit a three-year high of 2.8% y/y in Q1. The breakdown of the PMI data suggests that stronger activity was supported by domestic demand. The output sub-component rose, and new orders edged up even as the new export orders index fell.
- In contrast, the UAE’s PMI fell from a four-year high of 59.4 in May to 57.7 in June. The latest figure remains well above the 50-mark, which in theory at least, separates expansion from contraction. While most of the sub-components fell last month, new export orders edged up. This might reflect stronger external demand, particularly from the rest of the Gulf, for UAE goods and services.
- We don’t think that these strong readings will last. If we’re right in expecting the recent drop in oil prices to be sustained – we expect Brent crude will end the year at $60bp – budget positions will come under pressure and fiscal policy will become less supportive. This will weigh on growth in non-oil sectors. That said, activity in the UAE will be bolstered by preparations for the 2020 World Expo.
- Elsewhere, Egypt’s whole economy PMI picked up from 48.2 in May to 49.2 in June. The latest reading is still below the 50-mark, although the PMI doesn’t have a great relationship with the hard activity data.
- Price pressures in Egypt remained relatively subdued in June with both price sub-components still at low levels. The central bank is likely to keep interest rates on hold in the next couple of months, as it awaits greater clarity on the impact of recent and upcoming subsidy cuts. But if inflation drops back, as we expect, the easing cycle will probably be resumed by the end of the year – 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