Dubai economy continues to grow, keeps business optimism high

Emirates NBD

The Emirates NBD Dubai Economy tracker found strong expansion in business activity and growth in June, though at a slower pace than the previous month. With the start of Ramadan and shorter working hours beginning mid-June it was no surprise that the new orders index fell from 58.7 to 56.1. Yet businesses have a very optimistic outlook over the next year, with the business outlook index reaching 80.5, up from 62.1 in the same month last year.

Gulf News Journal spoke with Khatija Haque, head of MENA research at Emirates NBD, about the survey, and what it indicates about growth in the bustling emirate.

GNJ: Could you give us a quick summary of the report and the conclusions that you’ve come to?

Haque: What we’ve seen is that the momentum of growth for Dubai has slowed since the start of the year. That is something we’ve seen also for the whole UAE. So when we look at the UAE purchasing managers index we’ve seen very similar trends. Having said that, the output index, which is measuring business activity or business outputs, still remains relatively strong at 55.5 and anything above 50 signals a growth, and anything below 50 signals contraction. So the Dubai economy and non-oil private sector is still growing, it’s still growing at quite a solid pace. The reading is well above the mutual level, but the momentum or the pace of growth has slowed since the start of the year.

GNJ: It is mentioned in the report that some of the slowdown in growth might be because of Ramadan and Ramadan hours, how has that impacted growth? 

Haque: So basically these industries are seasonally adjusted. It’s quite difficult to remove all the seasonality when you are doing the adjustment because Ramadan moves relative to the Gregorian calendar every year. So I think there is still some seasonality evidence across the region’s PMI’s as well. It’s something that we’ve seen in the previous years. We would expect activities to start picking up again after August. So in the fourth quarter really we should start to see some recovery in the activity.

GNJ: Yet, surprisingly the travel and tourism industry rose, despite Ramadan.

Haque: It is a low season typically. But I think those who get the output or activity index measures actual output. These hotels are offering really good deals, discounted rates for clients in Asia for example or Russia where they have seen significant drop in demand because of currency pressure. The increase in the volume of tourists would show up in the output because there are more people coming, and they are probably spending more on food and beverages. So even if the revenue rates, or the revenue for room rates is lower, the actual physical volume is higher. That’s what these industries are measuring.

We do have components that attract prices, and we have seen softness in the prices both in terms of input costs, but particularly output prices have fallen across most of the sectors. There’s very little inflationary evidence in this survey. So there seems to be quite intense competition, and I think there probably has been in the tourism and travel industry some incentive and some offers that have been made to try and relay demand and increase volumes.

GNJ: You only looked at the three industries of construction, travel tourism and wholesale retail and trade? 

Haque: So the whole tracker covers a much broader sample of firms, so they will survey firms like services, logistics, and manufacturing. Then separately we’ve done separate surveys specifically on travel tourism, construction and retail because we don’t really have much data on these sectors outside of the survey. This is one way for us to get a sense quite quickly of what the activity and what the demand is for these sectors in a relatively timely way. What we’ve seen is that the construction sector has been growing very fast, very strongly through the year, and the rate of growth is actually faster than the other two sectors. So it really does seem to be a very big driver of Dubai’s overall activity over the last six months.

GNJ: But between May and June it also had the largest drop out of the three.

Haque: Yes, but the headline index is still very strong. So it came in at 57.9 which is just slightly lower than 62 which was the reading in June. But again as you are heading into the summer you would expect activity in the construction sector to fall because they have actually got additional restrictions on the hours that could be worked. So I suspect again that there is some seasonality in that. Having said that, optimism in that sector as well remains exceptionally high. Employment continues to rise there as well. So I think it remains, and probably will remain one of the main drivers in the Dubai economy for the rest of the year as well.

GNJ: What was the most surprising finding in the survey?

Haque: We don’t really forecast this survey because you know we don’t really have any other indicators of what’s going on in Dubai’s economy. I guess I’m actually quite pleasantly surprised that the index is still quite robust in the terms of the level of output. I mean we were in the middle of June, we had Ramadan starting the middle of the year, we’ve got really shorter working hours and generally it’s the slow season in terms of people going home for holidays and things like that. Yet, the activity growth seems to be quite strong across all the big sectors in Dubai. Overall the expansion and the level of optimism was certainly very surprising on the expectations side. So I think that probably for us that was the biggest surprise, because it says that over 12 months in the year businesses in Dubai are very very optimistic about the prospects for growth. 

GNJ: Is there anything worrying that you have found? 

Haque: I guess there’s nothing overly concerning because there’s nothing in the series that is really contracting except for prices. Output prices particularly in the wholesale and retail sectors are below the 50 readings and that really says that businesses in that sector are having their margins squeezed, because even as input prices might be rising they’re not really able to pass that on to consumers. So their margins are under pressure. Again, you could say that they’ve enjoyed several years of quite healthy margin growth so you know it’s very difficult then to maintain that indefinitely. And perhaps this is a normal business cycle, and they are feeling the pinch in terms of their margins.