Jordan: Growth will improve but remain lacklustre

We forecast a modest acceleration in real GDP growth in Jordan this year, rising to 2.4%, compared to our estimate of 2.2% growth in 2022. Ongoing support from the IMF and other partners, and a commitment to structural reforms from the authorities, should support stronger growth down the line, but this year residual challenges will remain, albeit easing from the levels of the past several years.

Jordan recorded real GDP growth of 2.5% and 2.9% y/y in the first and second quarter of 2022 respectively. Mining and quarrying recorded the strongest growth, averaging 6.2% y/y over the first half of 2022, while construction also performed well with an average 5.1% expansion. Manufacturing, traditionally the largest component of Jordan’s economy, averaged 3.5% growth. Restaurants & hotels was one the most rapidly expanding subcomponents of GDP with an average 6.7% as the sector continued to recover from the easing of Covid-19 restrictions both domestically and internationally. While it only accounts for around 1.2% of GDP, it supports other sectors such as construction (around 2.5%) and wholesale & retail trade (around 8.2%) and is also a major employer and a key source of FX.

Real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

However, we expect that growth will have slowed in the second half, informing our estimate of a full-year growth rate of 2.2% last year, matching the 2021 expansion. Private consumption will have been constrained by higher levels of inflation, which looks to have averaged around 5.2% y/y in the second half of the year compared with 3.3% in H1. Household spending power and the ability of businesses to invest will also have been dampened by interest rate rises which saw the rediscount rate hit 7.5% at year-end as the central bank hiked in tandem with the US Federal Reserve through the course of the year. A cost-of-living crisis in some key source markets for visitors will also have kept a lid on growth in the tourism sector. Industrial production data supports the expectation of a slowdown in growth – having averaged 4.3% y/y over January-June, the third quarter logged an average growth rate of just 1.3%.

CPI inflation, % y/y

Source: Haver Analytics, Emirates NBD Research

This year we expect a modest improvement in conditions, but growth is likely to remain lacklustre at 2.4%. Inflation has shown signs that it has peaked already, as it fell back to 5.2% y/y in October, from 5.4% the previous two months, and the Fed has slowed the pace of its rate hikes, which together should ease some of the mounting pressure. However, with China reopening we do not expect to see deflation in key commodities over the year, while the messaging from the Fed has been resolutely hawkish in stressing that there is no imminent pivot. Jordan has already seen sizeable protests over rising costs, with demonstrations over the cost of kerosene eventually prompting a suspension on tax on the fuel. This will give some relief, but with unemployment still high, the outlook for spending is not overly positive.

While the near-term outlook is not especially sanguine, Jordan continues to enjoy the support of the IMF, and the country remains committed to structural reforms which should help support steady and inclusive economic growth in the future. In December the Fund concluded its fifth review of Jordan’s EFF programme, praising the authorities’ ‘effective policy response’ and claiming that its financial support should help catalyze support from other donor sources also – Jordan has long been saddled with the additional burden of housing over 1mn regional refugees, making international support all the more pressing for the small economy of some 10mn people.