Jordan: Higher inflation outlook prompts growth downgrade

We have tempered our expectations for a comparatively strong rebound in Jordan this year, lowering our 2022 real GDP growth forecast from 3.0% to 2.5%. This would still mark the fastest pace of growth since 2015 but the outlook has clouded since our January update, with households now in a far weaker position than we had anticipated. Our downgrade to private consumption, which makes up the bulk of GDP, has brought the headline figure lower.

Jordan real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

In our last report we caveated our view with the risk that any new wave of Covid-19 would hamper the anticipated recovery, and then over the next two months Jordan experienced its most severe wave of infections. While economies all over the world have gotten far better at living with the virus, this nevertheless pushed back the easing of remaining restrictions in the country. Most domestic restrictions on activity have now been removed as of March 28, with restaurants, cafes and other venues now allowed to operate at full capacity, but the coronavirus wave will nevertheless have weighed on activity in the first quarter.

Meanwhile, inflation looks to be higher than we had initially anticipated, given the sharp rise in food and energy prices we have seen since the start of the year, as price pressures from reopening frictions related to the pandemic have been severely exacerbated by the Russian invasion of Ukraine. Some 40% of Jordan’s wheat imports come from the Black Sea region and Jordan’s food price inflation has hit a 22-month high of 4.0% y/y in March and is likely to head higher still in the coming months. Energy prices are also set to be higher for households as subsidies are reformed. We forecast an average CPI inflation rate of 3.1% this year, compared to 1.4% in 2021. With unemployment levels in Jordan still very high – 23.3% in Q4 – this will weigh heavily on households’ ability to consume.

Unemployment, %

Source: Haver Analytics, Emirates NBD Research

There are grounds for optimism, however. The inflation outlook could have been far worse if not for prudent measures taken by the government. Finance minister Mohamad al-Ississ said in April that the government had a stockpile of 13 months’ worth of wheat and had locked in long-term fuel contracts. Meanwhile, the ongoing global recovery from the pandemic, while hampered by the cost-of-living crisis, should see a substantial improvement in Jordan’s tourism sector this year, especially given the easing of final restrictions in March. This should bolster the economy by supporting households directly, given the high employment generated by the industry. Hotels & restaurants averaged y/y growth of 5.8% over Q2-Q4 last year, but there remains ground to be recouped before the subcomponent matches pre-pandemic levels. Visitor numbers hit 2.36mn in 2021, up around 90% on 2020 and beating government projections of 1.9mn.