Inflation rates will probably be higher in the Middle East than anywhere else in the world in 2005.
Rent a villa: rents have gone up 20-25% in the past year in Dubai. Buy a BMW: there was an across the board 5% price rise this month due to the euro. Buy a pint of milk: dairy prices are up 5-10%. The list goes on and on. The cost of living is going up in the Middle East.
With 10% GDP growth in the Oil States in 2004 this is to be expected. Economic growth attracts people, and people mean higher demand for goods and services and that means higher prices all-round.
The fact that GCC currencies are linked to the US dollar compounds this problem. It is not just BMW cars that the region buys from Europe, the majority of imports come from Europe, so as the dollar falls prices rise, and buying more from the US instead is just not always practical.
How high will inflation go in 2005? Shuaa Capital forecasts 3% in the UAE. But it is hard to know how high inflation will rise once this genie is out of the bottle.
For example, we have seen the US dollar rally in the past few days from USD1.37 to USD1.33 to the euro, but will this last? It could just be a bear market rally before the dollar plunges to USD1.50 as some commentators think, and that would be disastrous for inflation rates in the Middle East.
Indeed, with another year of major economic growth in prospect, and further dollar weakness a distinct possibility, then prudent managers in the region would be wise to plan for inflation in the 5-10% range this year.
The question then is whether salaries should also have a 5-10% increase. Again much depends on supply and demand. If a sector can import staff who will accept the former salaries and conditions then this is a way of dampening the impact of general inflation.
But existing staff are hardly likely to be happy if they see their standard of living slipping away at a time that they are working very hard.
That would add a wage-price spiral to local inflation. Really the inflation outlook in the Middle East this year is not good, and this needs to be faced in business planning.
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Inflation set to soar in 2005
- Saudi Arabia: Thursday, January 06 - 2005 at 11:21
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For the past decade inflation has been under control, but in the Middle East 2005 is likely to be full of unwelcome surprises. The oil boom is fuelling local inflation rates, and is compounded by the impact of the falling US dollar on euro imports.
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Peter J. CooperThursday, January 06 - 2005 at 11:21 UAE local time (GMT+4)
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This article was updated on Sun Jan 14 2007.
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