Weekly Insights

9 September 2022

Will inflation abate in the Middle East amid

economic recovery signals?
• PMIs signal economic recovery in the Middle East, alongside easing of input costs from recent
highs
• Saudi GDP reaffirms the growth story, with non-oil sector growing by 4.5% qoq
• Inflation is relatively muted in the GCC but remains elevated in both Egypt & Lebanon
• UN food price index falls for the 5th consecutive month, but other constraints will keep prices
high in the near-term
 PMIs signal economic recovery in the Middle East,
alongside easing of input costs from recent highs
• Non-oil economic activity in both Saudi
Arabia and UAE ticked up in Aug (highest
since Oct 2021 and Jun 2019 respectively),
thanks to strong domestic demand; export
orders are still relatively muted
• Businesses are cautious in passing on costs
to consumers (in UAE & KSA), with most
firms absorbing hikes and offering extra
discounts (as cost pressures eased)
• Qatar’s PMI softened to 53.7 in Aug (Jul:
61.5): both output and new orders rose, but at
a moderate pace; while firm cut headcounts,
optimism grows underpinned by the World
Cup megaevent this year
• Lebanon and Egypt also saw increases in
PMI, with the former crossing the 50-mark
(probably an impact from the summer
holiday season). Input costs inched up at a
much softer rate in both nations, offering
some relief. But sentiment remains weak
given Lebanon’s political uncertainty and
high inflation and supply worries in Lebanon
Saudi GDP reaffirms the growth
story, with non-oil sector growing
by 4.5% qoq
• Saudi GDP grew by 12.2% yoy in Q2, the highest growth rate
since Q3 2011, and higher than Q1’s 9.9% expansion
• While the oil sector grew by a rapid 22.9% yoy and 4.4% qoq,
non-oil sector also impressed, rising by 8.2% yoy (highest since
Q2 2021) and 4.5% qoq (the highest in 3 years)
• Among the non-oil sector, wholesale & retail trade, restaurants
& hotels notched up the highest gains (16.4% yoy & 19% qoq)
followed by construction (8.8% yoy & 8% qoq, not surprising
given the mega projects in NEOM and Riyadh)
Overall inflation remains relatively muted in
the GCC… though food inflation is a concern
 But is Double Digit in Egypt & Triple-Digit in Lebanon
• Egypt’s annual urban inflation rose to 14.6% in Aug (Jul: 13.6%) – the highest since Nov 2018, also much above the upper limit of
the central bank target of 5-9%. Food and beverage costs grew (23.1%), but core inflation also inched up (16.7% from 15.6%)
• Weaker EGP + import restrictions + fuel price rises (3X this year) : unlikely that inflation has peaked yet
• Currently, overnight deposit and lending rates stand at 11.25% and 12.25%. We believe that after holding interest rates steady at last 2
meetings, the CBE will have to raise rates before year-end – more a question of by how much, under the new central bank governor
• However, given its “too-big-to-fail” stature, Egypt has received financial support from the UAE, Saudi Arabia and Qatar, in addition
to investments in development projects
• Inflation in Lebanon stood at 168.4% yoy in Jul, the lowest since Sep 2021 and easing from Jun’s 210%. However, transport and
food and beverages costs continue at very high levels (353.85% and 240.2% respectively in Jul). Triple-digit headline inflation levels
have been in place for 25 straight months & largely a result of the LBP depreciation on the parallel market as well as supply shortages
UN food price index falls for the 5th
consecutive month, but other
constraints will keep prices high in
the near-term
• The UN FAO’s global food price index fell for the 5th
month in a row, with the index lower in Aug (138) than it
was pre Russia-Ukraine conflict (135.6 in Jan 2022):
partly due to the deal agreed to re-open ports in Ukraine
(resulting in lower cereal prices) and also given prospects
for strong harvests in the US, Canada, Russia
• The pass-though of this decline into countries’ inflation
readings will be slow, given the below factors:
o Fertiliser prices are rising after Russia limited its
exports (accounts for 14% of global fertiliser exports)
o While FDNY’s GSPCI shows that global supply chain
pressures have been declining for the past 4 months,
it is still near historical highs;
o Cost of processing, transportation & logistics remain
high following the pandemic;
o Strong USD also affects purchasing power of many
developing nations
• UN estimates that food prices could rise an additional
8.5% from current levels by 2027 (worst-case scenario)
• Food security could become a serious risk, especially with
spending on food reaching ~60% of monthly income
among low-income households=> potential social unrests
Prepared by:

Dr. Nasser Saidi Aathira Prasad

Founder & President Director, Macroeconomics
nsaidi@nassersaidi.com aathira@nassersaidi.com