Rising utility and energy costs in the UAE are likely to outweigh a drop in rents and a strong US dollar in 2017 and push consumer prices higher, according to economists.
Abu Dhabi Commercial Bank (ADCB) is forecasting that inflation will accelerate to 2.8 per cent in 2017 from 1.7 per cent in 2016, while Standard Chartered is expecting inflation to increase to 3 per cent this year from 1.8 per cent last year.
“We see this pickup as being partly driven by higher fuel prices,” said Monica Malik, ADCB’s chief economist.
“Other factors that we see feeding into higher inflation in 2017 included utility price increases in Abu Dhabi and a potentially more moderate fall in rental prices in Dubai as investment activity picks up.”
The economists surveyed also said that among the forces that will keep prices steady will be a strong US dollar as imports will remain cheap.
The Bloomberg Dollar Index, which tracks the value of the American currency against a basket of 10 global currencies including the euro and the yen, gained more than 5 per cent since Donald Trump’s US election victory in November and touched a record high during that period since the index was created in 2005. The UAE dirham is pegged to the US dollar.
However, there are a number of risks that may derail the dollar’s historic ascent, including an increasing war of words between the new US administration and China over the manipulation of the Chinese currency, which makes the Asian country’s exports more competitive. If the US dollar weakens this year, that may make inflation rise at a faster pace. However, a strong US dollar is overall negative for the UAE economy because it makes property more expensive for overseas buyers and dampens demand from tourists.
Receipts from service exports in the UAE, which include tourism revenue, account for 7 per cent of the country’s GDP, according to government statistics.
The IMF said in October that the UAE is projected to have grown at 2.3 per cent in 2016 and will grow by 2.5 per cent this year.
“On the strengthening of the dirham, the impact may not be conclusive,” said Dima Jardaneh, a Dubai-based economist at Standard Chartered.
“Exchange rate pass through in the UAE could vary across retailers depending on their cost and mark-ups and market share. It is also asymmetrical as retailers take longer to adjust their prices lower to reflect weaker currencies of goods origin.”
The UAE had strong non-oil private-sector growth last month in part because retailers slashed prices to encourage consumers, according to survey data from Emirates NBD.
Emirates NBD’s purchasing managers’ index (PMI) for the UAE rose to 55 in December from 54.2 in November, the bank said this month.
A reading above 50 indicates that the non-oil economy is growing, while a reading below 50 suggests that it is contracting. Khatija Haque, Emirates NBD’s head of Mena research, said that the rising PMI score indicated “a solid expansion in the non-oil private sector” during the past quarter.
UAE-based business leaders reported rising output last month as orders increased, amid a return to growth of new export business.