Inflation Heading Higher
BMI View: Consumer price inflation in the UAE will head higher in 2013, driven by solid economic activity and a tentative recovery in Dubai's housing market. We project inflation averaging 2.6% in 2013, compared to 0.6% and 0.2% in 2011 and 2010 respectively.
Consumer price inflation in the UAE is set to trend higher over the coming months, and could accelerate to its fastest pace in four years by the end of 2013. According to latest data from the National Bureau of Statistics (NBS) , inflation came in at a five month high of 0.7% y-o-y in February, up from 0.4% and 0.6% in January and December respectively. In month-on-month terms, prices contracted 0.1% in February, compared to a rise of 0.5% in January. Our baseline scenario sees inflation averaging 2.6% y-o-y throughout 2013, up from 0.6% and 0.2 % in 2011 and 2010 respectively, which is above consensus at the moment, and higher than the NBS' projection of 1.3%. A relatively solid macroeconomic backdrop and a gradual recovery in Dubai's housing market should help push the headline print higher. In contrast, we expect anaemic credit growth and the potential for further declines in Abu Dhabi's residential real estate market to help cap upside price pressures.
|UAE - Consumer Price Inflation, % chg|
Latest data highlights a slight divergence in inflationary trends throughout the economy. Food prices (which have a 14% weighting in the consumer price basket) increased 2.5% y-o-y in February, which marked the slowest pace since February 2010. Sharp declines were witnessed in prices of meat and poultry, in addition to vegetables, which declined 3.1% and 2.7% respectively compared to January. For the time being, we hold a relatively benign outlook on the prospects for food price inflation through the remainder of the year, with our Agribusiness research team projecting broadly stable global soft commodity and wheat prices over the coming quarters.
|Housing Prices Have Bottomed|
|UAE - Inflation by Component, % y-o-y|
In contrast, although housing prices (accounting for 36% of the price basket) remained in deflation, the pace of decline came in at its lowest level since December 2010, contracting by 'only' 0.9% y-o-y. As we have mentioned in previous research notes, the multi-year drop in Dubai's residential real estate market appears to have now finally come to an end, with reports indicating that rents are steadily being pushed up. A more detailed breakdown of the headline inflation print shows housing rents increasing 0.02% m-o-m in February, compared to 0.24% in January. The same cannot be said for Abu Dhabi's real estate market however, with the latest report by Jones Lang LaSalle on the emirate showing rents have further to fall on the back of an influx in new supply coming onto the market. As a result, we stress that inflationary trends across both emirates could diverge further in 2013, with prices in Dubai likely to accelerate at a faster pace than in Abu Dhabi.