UAE PMI points to solid growth in Q2 2017

The Emirates NBD Purchasing Managers’ Index (PMI) for the UAE increased to 55.8 in June from 54.3 in May, on the back of faster output and new order growth last month.  However, firms once again discounted selling prices in order to support order growth, with average selling prices declining for the third consecutive month.  Firms also cited increased marketing efforts as contributing to new order growth.  External demand softened slightly in June, with new export orders declining marginally.    

Employment remained broadly stagnant in June, with the index declining slightly to 50.4 from 50.7 in May.  This is disappointing against a backdrop of strong rises in output and new orders, and supports the view that firms are reluctant to boost hiring in an environment where their margins continue to be squeezed. 

While businesses are optimistic about the coming year, the business optimism index fell to 56.5 in June, the second-lowest level on record.  Just under 13% of firms expected output to be higher in twelve months’ time, compared to 23.6% in May.  Nevertheless, stocks of purchases (pre-production inventories) increased sharply in June, with this index rising to 57.3 from 54.7 last month, suggesting that firms do expect output and new work to remain strong in the coming weeks.  

The average PMI reading for Q2 2017 was 55.4, only marginally softer than Q1 2017 and consistent with a strong rate of non-oil private sector growth in the UAE.  The Q2 2017 PMI reading is also much higher than that for Q2 2016, confirming that non-oil growth has likely accelerated y/y, in line with our expectations. 

However, the extension of OPEC’s oil production cuts through H2 2017 and Q1 2018 has led us to downgrade our forecast for the UAE’s real GDP growth to 2.0% this year, down from 3.0% in 2016.  The downgrade was entirely due to the projected contraction in oil production, which is not captured in the PMI survey.  

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