Deflation threat averted

The Government yesterday published figures that showed inflation slowed to the lowest in almost a decade.

The UAE economy will avoid a long period of stagnation and sinking asset prices, the Governor of the Central Bank said yesterday. Sultan al Suwaidi's statement came a day after the Government released figures revealing inflation fell to its lowest level in almost a decade in April, sparking fears that the country could experience deflation, or negative inflation, later this year. "The dynamics in the UAE does not really have scope for deflation," Mr al Suwaidi said on the sidelines of a conference in Dubai yesterday. "I think we will use the extra capacity to expand our economy and go ahead." Periods of deflation have historically been associated with deeper economic downturns of the kind suffered by Japan during the 1990s, when its growth slowed and consumers reined in spending. In such cases, economists say deflation is a symptom of deeper economic difficulties, rather than a cause. Although the UAE could briefly witness similar falling prices this year, most economists say it will not suffer a long-term deflationary stagnation similar to that experienced by Japan. On Wednesday, the Government published figures showing that inflation slowed to 1.9 per cent in April, from 7.2 per cent at the start of the year. Until the financial crisis hit late last summer, double-digit inflation rates were the main worry in the Gulf as prices rose on the back of high oil prices and rapid economic growth, threatening to destabilise the region's economies. But since the onset of the crisis, oil and commodity prices have fallen and growth rates have slowed, easing the rate of price rises. House prices have also dropped, leading to an especially sharp decline in the cost of living in Gulf cities such as Dubai, which saw a 65 per cent decline in property prices from their peak in September, HSBC said on Sunday. Since the cost of housing makes up nearly 40 per cent of the basket of goods used by the Government to measure the cost of living for an average UAE resident, if it continues to fall while other prices stay relatively constant, economists say negative inflation is possible. "Should these trends continue, particularly in relation to housing costs, then the possibility might arise that the UAE could slip towards negative inflation later this year," said Tim Fox, the chief economist at Emirates NBD in Dubai. But the Japanese experience was not likely to be repeated in the Emirates. "Japan is not a relevant example in this context, given the deep differences between the two economies," said MR Raghu, the head of research at Markaz. "We're not talking about prolonged deflation here. You might see it on a monthly basis but when you average it over the year it will not be negative." Mr al Suwaidi added that the gap between loans and deposits in the UAE banking system had narrowed and he did not expect the Government to take further measures to improve the situation. Last month, he said the funding gap had decreased from Dh110 billion (US$29.95bn) in March to Dh91bn. "I think we will use the extra capacity to expand our economy and go ahead," Mr al Suwaidi said. "The gap has shrunk [to] a great extent and that reflects the dynamism that is in banking in the UAE." [e-mail]