Central Bank of UAE: Quarterly Economic Review - Second Quarter 2017

Transcription

1. Please Rate this Report Quarterly Economic Review Second quarter 2017
2. Please Rate this Report Table of contents Chapter 1 International Economic Developments ................................................................. 7 Chapter 2 Domestic Economic Developments....................................................................... 13 Chapter 3 Banking and Financial Developments.................................................................... 37 Chapter 4 Monetary Aggregates and Central Bank Balance Sheet......................................... 2 49
3. Please Rate this Report Figures Figure1 .1. GDP growth for selected countries Figure 1.2. PMI levels for selected developed countries Figure 1.3. PMI levels for selected MENA countries Figure 1.4. Year-on-year consumer price change for selected developed and emerging economies Figure 1.5. Year-on-year consumer price change for selected MENA countries Figure 1.6. Annual percentage change of equity indices (local) in developed economies Figure 1.7. Selected commodity price levels Figure 1.8. 10-year government bond yields for selected countries Figure 1.9. Policy rates for selected developed countries Figure 2.1.a. Oil Prices Development, Brent Price Figure 2.1.b. Non-Oil Quarterly Economic Composite Indicator (Non-Oil ECI) Figure 2.1.c. Overall Quarterly Economic Composite Indicator (ECI) Figure 2.2.a. Tradables and Non-Tradables Inflation Figure 2.2.b. Contribution of different sub-components to the Total CPI Inflation Figure 2.3.a. Employment Growth and Economic Activity in the UAE Figure 2.3.b. Employment Growth by Sector Figure 2.3.c. Employment Growth by Sector Figure 2.3.d. Employment and Credit developments in the Construction and Real Estate sector Figure 2.4.a. Nominal and Real Effective Exchange rates Developments Figure 3.1.1.a. Banking System Deposits for Conventional Banks Figure 3.1.1.b. Banking System Deposits for Islamic Banks Figure 3.1.1.c. Banking System Deposits for National Banks Figure 3.1.1.d. Banking System Deposits for Foreign Banks Figure 3.1.2.a. Banking System Assets and Credit for Conventional Banks Figure 3.1.2.b. Banking System Assets and Financing for Islamic Banks Figure 3.1.2.c. Banking System Assets and Financing for National Banks Figure 3.1.2.d. Banking System Assets and Financing for Foreign Banks Figure 4.1. UAE Monetary aggregates components growth Figure 4.2. Stock of UAE Monetary aggregates and their components Figure 4.3. Central Bank Liabilities Figure 4.4. Central Bank Assets Figure 4.5. Liquid Assets at Banks Figure 4.6. Libor Rates 3-month Figure 4.7. 10-year swap rates 3
4. Please Rate this Report Tables Table 1 .1. Real GDP growth in the MENAP region Table 2.1. Economic Growth in the UAE Table 2.2. UAE CPI Inflation Table 2.3.a. Dirham appreciation against currencies of top non-dollarized import partners Table.2.3.b. Dirham appreciation against currencies of top non-dollarized partners for non-oil export Table.2.5. Consolidated Government Finances Table 3.1.1.a. Deposits at UAE Banks Table 3.1.1.b. Deposits at Conventional/Islamic Banks Table 3.1.1.c. Deposits at UAE National/Foreign Banks Table 3.1.2.a. Assets and Credit at UAE Banks Table 3.1.2.b. Assets and Credit at UAE Conventional/Islamic Banks Table 3.1.2.c. Assets and Credit at UAE National/Foreign Banks Table 3.1.2.d. Banks credit to residents by economic activity Table 3.1.3.a. Financial Soundness Indicators in the UAE Table 3.1.3.b.Financial Soundness Indicators in the UAE for Conventional Banks Table 3.1.3.c. Financial Soundness Indicators in the UAE for Islamic Banks Table 3.1.3.d. Financial Soundness Indicators in the UAE for National Banks Table 3.1.3.e. Financial Soundness Indicators in the UAE for Foreign Banks Table 3.2.1. UAE – Securities Markets Table 3.2.2. UAE - Credit Default Swaps Table 4.1. Central Bank Balance Sheet Table 4.2. Central Bank's Foreign Assets 4
5. Please Rate this Report Boxes Box 1 . Recent Developments in the Real Estate Market ………………………………………………………………........17 Box 2. Dirham’s Fluctuations and External Competitiveness.……………………………..…….....…………………........23 Box 3. Workers’ Remittances …………………………………………………………………………………………........25 Box 4. Exchange Rate Appreciation and Tourism Activity in the UAE….....……………………...…………………........27 Box 5. Monetary Policy in the US and Implications on Credit Growth in the UAE….………………………………........39 5
6. Please Rate this Report Executive Summary The pickup in global economic growth remains on track , during the second quarter of the year as many economies reported better than expected GDP figures. The International Monetary Fund (IMF) projected that global output will be 3.5% in 2017 and 3.6% in 2018. However, contributions to global growth are different across countries. The US, Japan, China, and some Euro Zone economies reported better than expected second quarter growth figures. The US reported a 3% (annualized) GDP growth; Japan reported a better than expected growth of 1.0% (quarter-over-quarter); while China reported growth of 6.4% (year-over-year). Meanwhile, growth in other economies, including Saudi Arabia and the UK, is lagging with the IMF projecting zero percent growth for Saudi Arabia and 1.7% for the UK. Oil prices decreased in the second quarter of 2017, mainly because of expanding supplies in the US, Nigeria, and Libya. The US daily oil production increased to 9.2 million barrels in the second half of the year. Despite the agreement by OPEC members in November 2016 and an announcement in May this year to extend cuts in oil output by nine more months to March 2018, production within members of OPEC increased as Nigeria and Libya ramped up production. In the UAE, based on revised new figures of growth projections and global economic developments, the Central Bank of the UAE has revised its projections of the Real GDP growth and its components for 2017, and published its estimates for 2017 Q2. Non-oil GDP is estimated to grow by 3.1% in 2017, while oil GDP growth is projected to decline by 1.4%. The combined effect is estimated growth of Real GDP at 1.7% in 2017. The Economic Composite Index produced by CBUAE (ECI) estimates for 2017 Q2 are of 2.4% for the whole economy with non-oil GDP growing at 3.1% in the same quarter. Inflation declined in 2017 Q2 to 2% year-on-year (Y-o-Y) compared to the previous quarter, reflecting a fall in both tradables and non-tradables inflation. Housing CPI inflation also went down to 1.3% Y-o-Y, compared to 2.1% in 2017 Q1. Regarding banking activity, Government deposits increased at a slower pace in the second quarter of 2017. As a result, M2 and M3 declined marginally. Banks’ credit declined on a Quarter-to-Quarter (Q-o-Q) but continued to grow on a Y-o-Y basis, supporting growth in the non-oil activities. The Financial Soundness Indicators (FSIs) remained robust, showing that the UAE banking system is sound and stable. In addition, the Central Bank’s balance sheet exhibited an increase in 2017 Q2, triggered by increases in foreign assets. As a result, Total Assets increased owing mainly to rising Cash and Bank Balances and Central Bank’s Deposits abroad. Meanwhile, interest rates in the UAE continued their upward trend in line with the Fed’s decision announced on the 14th of June 2017. 6
7. Please Rate this Report Chapter 1 . International Economic Developments ______________________________________________________ The pickup in global growth remains on track, with global output projected to grow by 3.5% in 2017 and 3.6% in 2018. These global growth projections mask somewhat different contributions at the country level. US growth projections have been revised down, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated. Growth has been revised up for Japan and the euro area, where positive surprises to activity in late 2016 and early 2017 point to solid momentum. China’s growth projections have also been revised up, reflecting a strong first quarter of 2017 and expectations of continued fiscal support. The pickup in global growth remains on track with somewhat different contributions at the country level. According to the International Monetary Fund’s (IMF) July 2017 World Economic Outlook (WEO) update, the global economy is expected to grow by 3.5% in 2017 and 3.6% in 2018. While these projections remain unchanged from the April WEO, contributions to growth by country have been revised. US growth projections have been revised down, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated. Growth has been revised up for Japan and the euro area, where positive surprises to activity in late 2016 and early 2017 point to solid momentum. China’s growth projections have also been revised up, reflecting a strong first quarter of 2017 and expectations of continued fiscal support. For India, growth is forecast to pick up further in 2017 and 2018, in line with the April 2017 forecast. While activity slowed following the currency exchange initiative, growth for 2016, at 7.1%, was higher than anticipated due to strong government spending and data revisions that show stronger momentum in the first part of the year. For China, the IMF expects growth to remain at 6.7% in 2017, the same level as in 2016, and to decline only modestly in 2018 to 6.4%. The forecast for 2017 was revised up by 0.1 percentage point from the April forecast, reflecting the stronger than expected outturn in the first quarter of the year underpinned by previous policy easing and supply-side reforms (including efforts to reduce excess capacity in the industrial sector). For 2018, the upward revision of 0.2 percentage points from the April forecast mainly reflects an expectation that the authorities will delay the needed fiscal adjustment (especially by maintaining high public investment) to meet their target of doubling 2010 real GDP by 2020. Official statistics from the Chinese government showed that second quarter 2017 growth beat expectations – coming in at 6.9% over the previous year (see Figure 1.1.). Quarter-on-quarter, the economy grew by 1.7%. Among the UAE’s major trading partners, Japan, India, China, and Saudi Arabia, the growth forecast is mixed. For Japan, the IMF upgraded its forecast for the world’s third-largest economy to 1.3% in 2017 from an April projection of 1.2%. The forecast for 2018 remains at 0.8%. Strong net exports and increases in inflation and factory output will contribute to the growth prospects. Meanwhile, Japan’s second quarter GDP exceeded expectations growing at the fastest pace in more than two years as consumer spending and capital expenditure both rose at the fastest rate in more than three years, highlighting stronger domestic demand. GDP expanded at an annualized 4.0% in the second quarter, the biggest increase since the first quarter of 2015. Quarter-onquarter, the economy expanded by 1.0% from the first quarter. Year-on-year, the Japanese economy expanded by 2% in the second quarter (see Figure 1.1.). 7
8. Please Rate this Report nonresidential fixed investment , exports, and federal government spending that were partly offset by negative contributions from private residential fixed investment, private inventory investment, and state and local government spending. Imports also increased. Year-onyear, the US economy grew by 2.1 percent from the previous year (see Figure 1.1). Figure 1.1. GDP growth for selected countries (Y-o-Y, %) 6.8 6.9 6.9 Q4 16 1.8 2.0 2.1 USA Q1 17 1.9 2.0 UK 1.7 Q2 17 1.9 1.9 2.2 Euro Zone 1.7 China The growth forecast has also been revised down for the United Kingdom for 2017 on weaker-than-expected activity in the first quarter. In the second quarter, GDP increased by 0.3%, a slight improvement from the prior quarter. Growth accelerated in the second quarter thanks to a rebound from the services sector. Growth in movies and retail sales also boosted the figure. The second quarter figure marked a slight improvement on the 0.2% growth seen during the first quarter of the year, but failed to match a reading of 0.7% for the final three months of 2016. Year-over-year, the UK economy grew by 1.7% in the second quarter (see Figure 1.1.). 2.0 1.5 Japan Source: Bloomberg For Saudi Arabia, growth is expected to slow to zero percent in 2017 because of lower oil production and ongoing fiscal consolidation. According to the IMF, nonoil growth is projected to pick up to 1.7% in 2017 while the oil growth is projected to be -1.9% as oil GDP declines in line with Saudi Arabia’s commitments under the OPEC agreement1. Growth is expected to strengthen over the medium-term as structural reforms are implemented. Employment growth has also weakened, and the unemployment rate among Saudi nationals has increased to 12.3%. By contrast, growth projections for 2017 have been revised up for many euro area countries, including France, Germany, Italy, and Spain, where growth for the first quarter of 2017 was generally above expectations. Despite heightened uncertainty about Brexit, growth in the 19-nation Eurozone in 2017 is expected to be 1.9% – a slight improvement from the previous year. Meanwhile, official statistics from Eurostat showed that GDP in the Eurozone increased 0.6% in the second quarter compared to 0.5% in the previous quarter. Year-on-year, GDP increased by 2.2% in the second quarter of 2017 compared to the same period last year (see Figure 1.1.). The growth forecast for the United States has been revised down from 2.3% to 2.1% in 2017 and from 2.5% to 2.1% in 2018. The major factor behind the revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes. In addition, market expectations of fiscal stimulus have also receded. However, official statistics showed that GDP increased at an annualized rate of 3% in the second quarter of 2017 compared to 1.2% (revised) in the first quarter of 2017. The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), In the Middle East, North Africa, Afghanistan, and Pakistan (MENAP)2 region, the global factors shaping the world economic outlook for 2017 will be reflected in the outlook for the region through their impact on commodity prices, export demand, remittance flows, exchange rates, and financial conditions. The IMF suggests that global outlook is consistent with somewhat higher commodity prices and stronger global trade, which will support economic activity in the MENAP region. In addition, stronger growth in China will also support 1 2 In November of 2016, OPEC reached an agreement to cut oil production to 32.5 million barrels a day. MENAP oil exporters: Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen. MENAP oil importers: Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Sudan, Syria, and Tunisia. 8
9. Please Rate this Report anticipated investment in some countries . However, the outlook also implies higher interest rates, which will, to different degrees, increase fiscal vulnerabilities across the region. For MENAP oil exporters, growth is expected to slow in 2017 because of the oil production cuts agreed to under the terms of the recent OPEC deal. In contrast, although the outlook varies across individual countries, overall growth in the non-oil sector is expected to increase in 2017 as the pace of fiscal consolidation eases. For MENAP oil importers, growth is expected to increase from 3.7% in 2016 to 4% in 2017 and to 4.4% in 2018. In addition, growth will be supported by the broader global recovery, which is expected to boost demand from the region’s main export markets (see Table 1.1.). In the Middle East and North Africa (MENA) region, PMI levels decreased from first to second quarter for all countries where data are available except for Egypt, which registered a slight improvement, although remains in contractionary territory. In Saudi Arabia, PMI in the non-oil private sector economy fell from 55.3 in May to an eight-month low of 54.3 in June. Moreover, the average performance of the second quarter of 2017, 54.3 was weaker than the average performance of the first quarter, 56.7. PMI levels for both the UAE and Lebanon decreased slightly from first to second quarter (see Figure 1.3.). Figure 1.2. PMI levels for selected developed countries 60 Expansion Table 1.1. Real GDP growth in the MENAP region Projections 2015 2016 2017 2018 2.8 2.7 3.9 2.6 3.4 MENAP oil exporters 2.6 2.1 4.0 1.9 2.9 MENAP oil importers 3.1 3.9 3.7 4.0 4.4 MENAP 55 50 Contraction 2014 45 40 USA Source: IMF staff calculations Q2 2016 Japan Q3 2016 UK Eurozone Germany France Q4 2016 Q1 2017 Italy Q2 2017 Source: Bloomberg The growth figures described in previous paragraphs are reflected in the Purchasing Manager’s Index (PMI) for the respective economies.3 The Eurozone economies show continued improvements in both manufacturing and services PMIs. The Eurozone’s overall PMI increased from 55.6 in the first quarter to 56.6 in the second quarter. For individual Eurozone countries, Germany’s PMI increased from 56 to 56.8, France from 55.6 to 56.7, and Italy from 53.9 to 55.5. The PMI levels for the US and the UK increased to a lesser extent. Japan’s PMI also showed improvements in the second quarter of 2017. Japan’s manufacturing PMI continued to improve in June to 52.4, extending the current sequence of expansion to ten months. The services PMI edged up to 53.3 in June, from 53.0 in May. Overall, Japan’s PMI increased from 52.4 in the first quarter to 53.1 in the second quarter (see Figure 1.2.). Figure 1.3. PMI levels for selected MENA countries 60 55 Contraction 50 45 40 Saudi Arabia Q2 16 Source: Bloomberg 3 A PMI reading above 50 indicates expansion and below 50 a contraction. 9 Egypt Q3 16 Lebanon Q4 16 Q1 17 UAE Q2 17
10. Please Rate this Report Tunisia , prices edged up slightly, as prices accelerated for transport, clothing and footwear, furnishings, health, and hotels and restaurants. Bahrain’s inflation rate increased slightly as prices of food and non-alcoholic beverages, which account for 16% of consumer expenses, rose from a year earlier. In Saudi Arabia, deflation continues as prices fell for the second consecutive quarter – reaching 0.6%. Prices declined for food and beverages, transport, clothing and footwear, furnishings and recreation and culture. In contrast, cost of housing and utilities went up at a faster pace (see Figure 1.5.). Figure 1.4. Year-on-year consumer price change for selected developed and emerging economies 3.43.5 Q4 16 Q1 17 Q2 17 2.7 2.6 2.1 2.2 2.1 2.1 1.9 1.9 1.8 1.7 1.6 1.5 1.2 1.1 1.4 1.4 1.1 0.9 0.6 0.30.4 0.3 China India France Germany Eurozone UK Japan US Figure 1.6. Annual percentage change of equity indices (local) in developed economies (%) 30 Source: Bloomberg 20 Inflation as measured by consumer prices decreased, year-on-year, for all the selected economies in Figure 1.4 except for the UK, China, and Japan. Consumer price inflation edged up slightly for both Japan and the UK, while holding steady for China. These figures suggest that price developments have been relatively weak and many central banks are struggling to meet their inflation targets. The Bank of Japan, for example, pushed back by a year the timing for hitting its 2% inflation target, a blow to the bank’s radical monetary experiment aimed at sustainably ending deflation (see Figure 1.4.). 10 0 -10 -20 Q2 2017 Italy MIB France CAC 40 1.3 1.0 0.5 0.9 0.7 In the second quarter of 2017, the price levels of Brent crude and natural gas increased while the price levels of gold and silver decreased from the same period last year. Brent crude prices increased 9.4% and natural gas increased 3.8%. Gold prices decreased 6.1%, and silver decreased 11.1%, as investors’ concerns about US future Federal Reserve interest rate hikes, and political uncertainty outside the US factored into prices (see Figure 1.7.). 0.3 Morocco Tunisia Qatar Oman Bahrain Kuwait Saudi Arabia -0.3 -0.6 1.8 2.0 Q1 2017 Germany DAX 1.7 1.6 Euro Area EuroStoxx 2.3 1.9 UK FTSE 100 2.7 2.2 Japan Nikkei 4.0 3.5 3.0 Q4 2016 Regarding the financial sector, all developed economy equity markets registered positive annual returns during the second quarter of 2017. Japan’s Nikkei registered the largest gain, increasing 28.6% from the same period last year. Other noticeable increases were registered by Germany’s DAX (27.3%), Italy’s MIB (27.1%), and France’s CAC 40 (20.8%) (see Figure 1.6.). 4.64.9 Q2 17 US Dow Jones Q1 17 Q3 2016 Source: Bloomberg Figure 1.5. Year-on-year consumer price change for selected MENA countries Q4 16 Q2 2016 MSCI World (local) -30 Source: Bloomberg Quarter-on-quarter, oil prices decreased 7.1% ($54 to $50) in the second quarter mainly due to expanding For the MENA region, inflation is moderating in most of the region, with the exception of Tunisia and Bahrain. In 10
11. Please Rate this Report supplies in the US , Nigeria, and Libya. The US daily oil production increased to 9.2 million barrels in the second half of the year. The U.S. Energy Information Administration (EIA) forecasted that total U.S. crude oil production will average 9.3 million barrels per day (b/d) in 2017, up 0.5 million b/d from 2016. In 2018, the EIA expects crude oil production to reach an average of 9.9 million b/d, which would surpass the previous record of 9.6 million b/d set in 1970. government bond yields made gains thanks to the European Central Bank’s (ECB) commitment to extend its quantitative easing program through the end of 2017 and signs of economic recovery in many Eurozone economies. Similarly, the UK bond yields also moved slightly higher, while Japanese bond yields remained in negative territory mainly because of the negative interest rates kept by the Bank of Japan. Figure 1.8. 10-year government bond yields for selected countries (%) 3.0 Despite the landmark deal by OPEC in November 2016 and an announcement in May this year to extend cuts in oil output by nine more months to March 2018, production within members of OPEC increased as Nigeria and Libya ramped up production despite the OPEC agreement. Production in Libya is currently at a four-year high, ranging between 950,000 bpd and “close to” 1 million bpd. Nigeria’s production reached 2.06 million bpd in the second quarter from 2.04 million bpd in the previous quarter. These factors are complicating OPEC’s prospects of curbing global oil supply and thus putting downward pressure on oil prices. Japan UK Euro Area 2.0 1.0 0.0 -1.0 Source: Bloomberg Figure 1.7. Selected commodity price levels (Y-o-Y, %) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% US Figure 1.9. Policy rates for selected developed countries (%) 1.2 1.0 0.8 Brent Natural Gas Gold US Fed Funds Rate (mid) BoJ Overnight Call Rate ECB Refinancing Rate BoE Policy Rate 0.6 Silver 0.4 0.2 Q2 2016 Q3 2016 Q4 2016 Q1 2017 0.0 Q2 2017 -0.2 Source: Bloomberg During the second quarter of 2017, government bond yields moved higher, in general, reflecting stronger outlook of rising inflation and rising expectation of tighter liquidity going forward (see Figure 1.8.). In the United States, government bond yields increased amid expectations of continued Federal Reserve (Fed) commitment to rising interest rates in 2017 and 2018. The strong jobs numbers are also likely to encourage the Fed to further tighten monetary policy. In the Eurozone, Source: Bloomberg In terms of monetary policy, the Fed raised short-term interest rates by a quarter point in its June meeting. It was the Fed's third rate hike since December. And it is a sign that the central bank believes the U.S. economy is on solid ground. The Fed's key interest rate now ranges between 1% and 1.25%. The ECB left its benchmark interest rate unchanged at 0.00% in its June meeting – 11
12. Please Rate this Report marking 16 consecutive months of 0 .00% interest rates. The ECB also announced that it expected interest rates to remain at present levels for an extended period of time and that it would be ready to extend its quantitative easing (QE) program if needed. The Bank of England (BoE) has also left the UK interest rates at their current low record of 0.25%. According to the BoE, a combination of weak UK economic data and uncertainty surrounding Brexit talks contributed to their decision to keep rates unchanged (see Figure 1.9.). 12
13. Please Rate this Report Chapter 2 : Domestic Economic Developments ____________________________________________________ According to the Non-Oil Economic Composite Indicator (Non-Oil ECI), the non-hydrocarbon sector in the UAE grew by 3% in the second quarter of 2017, driven mainly by the slower pace of the fiscal consolidation, higher oil prices and improved growth in the main UAE trading partners. The overall Economic Composite Indicator grew at a slower pace by 2.4% on account of the oil production cut to which the UAE has committed. The inflation rate declined again to reach 2% after a rebound of 2.7% in the first quarter of the year, primarily driven by the slowdown of Housing and Utilities Prices (1.3% against 2.1%) and Transportation Costs (5% against 8.5%). 2.1. Economic Activity and Growth The OPEC agreement effective January 2017 continued to help momentum in global oil prices in the second quarter of 2017 compared to the previous year. The Global Brent price increased by 9.4% on a yearon-year basis (see Figure 2.1.a.). Notwithstanding this improvement, the quarter-on-quarter average oil prices growth turned to be negative during the second quarter. Oil prices declined by 7.1%, on news of higher inventories in the US, casting doubt on the sustainability of the positive slope that prevailed since the last quarter of 2016. improvement in the quarterly growth of Non-Oil GDP in the UAE, the quarterly Non-Oil ECI was growing by a quarterly average of 2.8% in 2016 to reach a quarterly average growth of 3.1% in the first half of 2017 thanks to the improvement of the market sentiments boosted by the rally in the oil price. The overall ECI index summarizes the global economic activity, including the oil sector. As the latter has been contracting in accordance with the UAE’s commitment to the cut in oil production, overall growth in the economy is estimated at 2.4% in the second quarter of 2017 against 3.3% in the first quarter (see Figure 2.1.c.). Figure 2.1.a. Oil prices development, Brent price Figure 2.1.b. Non-Oil quarterly Composite Indicator (Non-Oil ECI) Economic Source: IMF Nonetheless, the non-oil economic activity in the UAE continues to demonstrate a strong resiliency to oil price volatility. In fact, the Economic Composite Indicator (ECI) index developed by the Central Bank estimates a 3% growth of the non-oil economic activity in the UAE during the second quarter on a year-on-year basis against 3.1% in the first quarter (see Figure 2.1.b.). In consistency of continued Source: CBUAE The slowdown in the overall growth of economic activity was due to the decline of the oil production. In 13
14. Please Rate this Report line with the UAE ’s commitment to the OPEC agreement, oil production has declined by more than 1% in the second quarter. Figure 2.1.c. Overall quarterly Composite Indicator (ECI) 2016, to which the non-oil sector contributed 2.7% and the oil sector contributed 3.8% (see Table 2.1.). In contrast, given estimates for the first half of 2017, the CBUAE projects growth in 2017 to reach 1.7%, of which growth in the oil sector is -1.4% and growth of non-energy is 3.1%. Economic Table 2.1. Economic Growth in the UAE (%) 2014 2015 2016 2017(E) 3.3 3.8 3.0 1.7 Real Oil GDP 0.4 5.4 3.8 -1.4 Real Non-Oil GDP 4.6 3.2 2.7 3.1 Real GDP Source: Federal Competitiveness and Statistics Authority (FCSA) for 2014, 2015, and 2016, and Central Bank estimations (E) 2017. Note: For more details concerning the GDP figures revision and the Central Bank’s estimates, see “Box: GDP forecasting model of the Central Bank of the UAE” in the Quarterly Economic Report for Q4 2015 in the CBUAE website. Source: CBUAE Following the new revisions of the GDP figures announced by the Federal Competitiveness and Statistics Authority, real GDP growth reached 3% in 14
15. Please Rate this Report 2 .2 Consumer Price Index and Inflation non-tradables inflation starting from 2.6% in April to fall further in May reaching 1.9% (see Figure 2.2.a.). The headline inflation has declined during the second quarter of 2017 to reach 2% against 2.7% in the first quarter (see Table 2.2.). The Consumer Price index (CPI) increased by 2% at the end of the quarter coinciding with the lowest price volatility during the first half of the year. This disinflation was the result of a decline in both tradables and non-tradables inflation (see Figures 2.2.a. and 2.2.b.). Housing costs cover rental prices and utilities costs and account for 52% of the non-tradables in the UAE. Their price inflation followed a decreasing trend since the third quarter of 2015. Housing prices increased by 1.3% in the second quarter of 2017 against 2.1% in the first quarter. The average housing price inflation for the first half of the year increased by 1.7% against 4.2% during the same period in 2016 and 8.8% during the same period in 2015. (For more details on Real Estate market developments see Box1) Tradables prices, which account for 34% of the consumption basket in the UAE, increased by 2.7% in the second quarter of 2017 against 3.4% in the previous quarter. The tradables’ inflation slowdown was driven by the decline of the tradable part of transportation costs. In fact, the energy retail prices increased by 5% in the second quarter after an increase of 8.5% previously in line with the decline in international oil prices. The indexation of energy retail prices to international oil prices started in August 2015 when the government implemented the energy subsidy-cut. This reform has contributed to the increase of transportation cost volatility by around 30%. Table 2.2. UAE CPI inflation (%) Weight % Q3 Q4 Q1 Q2 100 2.1 1.7 1.5 1.9 2.7 2.0 CPI Inflation 100 1.4 1.8 1.4 1.2 3.0 2.0 Tradable Inflation Non-tradable Inflation 34 -0.4 0.3 -0.7 0.6 3.4 2.7 66 2.6 1.9 2.1 2.7 2.9 2.1 Housing Inflation 34 5.1 3.3 4.1 3.7 2.1 1.3 Transportation Inflation 15 -6.7 -2.7 -5.9 -1.1 8.5 5.0 Other4 Inflation 51 1.4 1.2 1.3 1.7 2.4 2.3 Source: Federal Competitiveness and Statistics Authority (FCSA). Note: All the changes are computed on a Y-o-Y basis and based on the quarterly average CPI, unless otherwise indicated. The Tradables and non-tradables inflation rates were computed using the Y-o-Y growth of weighted-average CPI of different sub-components. The deflation of communication prices continues for the ninth consecutive quarter reaching maximum price decline in the second quarter of 2017 by 2.5% (see figure 2.2.b.). The average drop of communication costs was 2% in the first half of 2017 against an average drop of 0.1% during the same period of 2016. Accounting for 66% of the consumption basket in the UAE, the price inflation of non-tradables increased by 2.1% in the second quarter of 2017 against 2.9% previously with an end-of-period inflation of 1.7%. The quarter was characterized by a decreasing trend of the 4 2017 Q2 CPI Inflation (period average) (end-of-period) The price inflation of textiles, clothing and sportswear declined in the second quarter of 2017 to reach 1% against 1.4% in the first quarter. Similarly, the furniture and households’ goods inflation displayed a drop from 1.9% in the first quarter to stand at 1.2% in the second quarter of 2017. The declining trend for both items was triggered by the large sales promotions and discounts associated with the Holy Month of Ramadan. On the other hand, food and soft drinks prices increased by 0.8% in the second quarter of 2017 against a previous growth of 0.3% in the first quarter, reflecting the depreciation of the dirham. 2016 Q1 Similarly, recreation and culture costs realized a decline of 4.5% for the second consecutive quarter leading to an average deflation of 4% during the first half of the year. On the other hand, education costs kept increasing from the end of 2015 and jumped by 4.7% in the second quarter of 2017. Excluding housing and transportation 15
16. Please Rate this Report Figure 2 .2.a. Tradables and Non-Tradables Inflation (%) Source: Federal Competitiveness and Statistics Authority (FCSA). Figure 2.2.b. Contribution of different components to the total CPI inflation (%) sub- Source: Federal Competitiveness and Statistics Authority (FCSA). 16
17. Please Rate this Report Box 1 : Recent Developments in the Real Estate Market According to REIDIN Price Index5, Q2 2017 illustrates continued decline in the UAE residential Market, but with different patterns of change for Abu Dhabi and Dubai markets. In fact, during the second quarter of 2017, the annual change in property prices decreased slightly by 0.29% in Dubai, while the prices declined by 6.6% in the Abu Dhabi market. Moreover, the rental yield in both emirates contracted during the second quarter of 2017, due to the more pronounced fall in rents, but remains attractive for investors (7.16% for Abu Dhabi and 7.11% for Dubai). Figure 2: Dubai residential rent prices Source: REIDIN Dubai residential market Concerning investment in Dubai’s real estate market, 2016 was marked by a slowdown in rental yield from a high of 7.46% in the first quarter to a low of 7.20 % in the last quarter of 2016 (Figure 3). This trend was a result of relatively stable prices towards the end of the year, combined with further decline in rents. More recently, the rental yield reached 7.11% during the second quarter of 2017, but remains attractive for investors. In the second quarter of 2017, the change in property prices, which measures the average sample price in dirham per square meter, decreased marginally by 0.29% compared to last year, but at a slower pace than in 2016 (Figure 1). Therefore, the trend observed since 2016 has started to show signs of price stabilization in the residential market in Dubai during 2017. Figure 1: Dubai residential sale prices Figure 3: Dubai rental yield (%) Source: REIDIN Source: REIDIN Despite the property price stability since mid-2016, the Dubai rental market continues to decline (Figure 2), due to low demand and a softer job market. Indeed, rent prices declined by an annual rate of 4.5% in the second quarter, following a decrease of 3.7% in the previous quarter. 5 REIDIN Residential Sales Price Index series are calculated on a monthly basis and cover 21 areas and 6 districts in Dubai. For Abu Dhabi, the indices cover 7 areas and 5 districts. 17
18. Please Rate this Report Abu Dhabi residential market For Abu Dhabi , the REIDIN Price Index exhibited continued fall in residential property prices of 6.6% y-oy on average in the second quarter of 2017, following a decrease of 6.0% in the previous quarter (Figure 4). Concerning the rental yield, Abu Dhabi registered a yield of 7.16% for the second quarter of 2017, down from 7.2% in the previous quarter (Figure 6). The observed pattern in rental yield reflects a faster pace of decline in rent relative to property values, in consistency with the continued decline in the job market relative to the investment sentiment in properties, given the persistence of low oil prices. Figure 4: Abu Dhabi residential prices Figure 6: Abu Dhabi rental yield (%) Source: REIDIN As for the rental market, in addition to the reinstatement of the 5% residential rent cap in mid-December 2016, the rent values in Abu Dhabi continued to decline at an annual rate of 10% on average in the second quarter of 2017, after a reduction of 9.2% in the previous quarter. This trend reflects the impact of a softer job market and the cuts in public expenditures, which continue to weigh in on demand in the housing market (Figure 5). Source: REIDIN Figure 5: Abu Dhabi residential rent prices Source: REIDIN 18
19. Please Rate this Report 2 .3 Employment and labor market dynamics labor demand in the Services sector as well as the Real Estate sector, while the labor demand by the Manufacturing sector has recovered. The employment growth in the services sector was the most affected by the economic slowdown. The number of employees in the Services sector declined by 3.1% in the first quarter of 2017 on a year-on-year basis, against a 0.8% increase in the last quarter of 2016. It is the first drop ever observed according to available information. The Real Estate sector is another sector where the labor demand declined by 1.7%. Except for the Construction and Manufacturing sectors where employment increased by 5.2% (from 3.7%) and 0.7% (from -0.1%), respectively, the labor demand has slowed down in the Transport, Storage and Communication sector, where the demand for labor grew only by 0.5% in the first quarter of 2017 against 3.2% in the last quarter of 2016. Aggregate employment continued its decreasing trend for the fifth consecutive quarter. Its growth slowed down further in the first quarter of 2017 to reach 1.2% on a year-on-year basis after 3.1% in the last quarter of 2016. It is the lowest reading recently observed6 (see Figure 2.3.a.). Compared to the previous quarter, the demand for labor by different sectors of the UAE’s economy increased during the first quarter of 2017 by 0.5%, but lower than the 0.8% and 1.1% growth registered during the third and the fourth quarters of 2016, respectively. The decreasing trend of employment reflects the slowdown in the domestic economy in the aftermath of the declining oil prices starting mid-2014. Although labor demand showed some resiliency to external shocks so far, fiscal consolidation, particularly the sharp decline in capital spending, weighed significantly on the declining labor demand. Figure 2.3.b. Employment growth by sector (%, Y-oY) Figure 2.3.a. Employment growth and economic activity in the UAE Source: Ministry of Human Resources and Emiratisation The short-term developments of the labor demand in all sectors are depicted by Figure 2.3.c. Total employment grew by 0.5% compared to the last quarter of 2016, to which the Construction sector contributed 2.9%, Manufacturing sector 3.7% and Transport, Storage and Communication sector 0.3%. The labor demand declined in the Services and Real Estate sectors by 1.9% and 2.5%, respectively. Source: Central Bank of UAE and Ministry of Human Resources and Emiratisation Figure 2.3.a. shows the delayed negative impact of the economic slowdown, charted by the ECI and the Non-Oil ECI on the labor demand by all sectors of the economy (see Figure 2.3.b.). This continued decline in annual employment growth was driven mainly by the decline of 6 Data for the second quarter of 2017 are not available yet. 19
20. Please Rate this Report The developments in the employment level of the Construction and Real Estate sectors can be explained by the slowdown in their levels of investment . The domestic credit allocated to both sectors slowed down (see Figure 2.3.d) increasing by only10% on a year-on-year basis, the lowest growth rate since the third quarter of 2015. The quarterly annual domestic credit and the quarterly employment growth for the Construction and the Real Estate sectors exhibit a correlation of 88.7% in 2016. Figure 2.3.c. Employment growth by sector (%, Q-oQ) Source: Ministry of Human Resources and Emiratisation The Construction and The Real Estate sectors which absorbed altogether around 45% of the total employment in the first quarter of 2017 showed labor demand slowing down and reaching a growth rate of 3% on a year-on year basis against a previous increase of 4%. It is the lowest growth rate given the available information and lower than the quarterly average annual employment growth rate since the first quarter of 2015 (7%). Figure 2.3.d. Employment and credit developments in the Construction and Real Estate sector Source: Ministry of Human Resources and Emiratisation and CBUAE 20