Signs of a slowdown in Emirates' economy

Signs of a slowing local economy emerge as bank lending and business activity both drop.

Bank lending decreased in October for the second month running as global economic conditions impact on local businesses. Nicole Hill / The National

Fresh signs emerged yesterday of a slowdown in the UAE's economy as the latest data showed bank lending dropped while growth in business activity eased.

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Bank lending decreased in October for the second month running and deposits continued to fall as funds were withdrawn from the banking system. The slowdown in loan growth coincided with a deceleration of business growth last month, the data shows.

"There's no sign of a recovery in lending and that speaks of more sluggish private-sector growth in the economy," said Liz Martins, the senior Middle East and North Africa (Mena) economist at HSBC.

Confidence among banks and businesses has been dented this year by the sovereign debt crisis in Europe and a cooling global economy.

As a result, economists are warning the country's growth is likely to slow next year.

Net loans and advances throughout the UAE's banks fell 0.2 per cent in October from the month before to Dh1.07 trillion (US$292 billion), data released by the Central Bank shows. During the same period, bank deposits fell 0.4 per cent to Dh1.06tn.

The banking sector experienced a huge influx of deposits at the beginning of this year, with Dh78.7bn entering the financial system between January and the peak in April.

However, the latest figures reveal that surge in liquidity has been almost completely evaporated, leaving levels of bank deposits below loans for a second month.

With bank lending constrained, the ability of the private sector to expand has been limited.

The latest HSBC purchasing managers' index (PMI) signalled "a weaker improvement in the health of the sector" during last month, the report said.

The UAE's PMI last month was 52.5, down from 53.4 in October. A reading above 50 signals expansion.

"The private sector is still expanding but the weaker PMI suggests the economy is struggling to maintain momentum," said Simon Williams, the chief Mena economist at HSBC.

"The soft new export orders reading is a particular worry given how reliant the open UAE economy is on external demand."

New export orders rose at a weaker pace last month than in October, with growth hitting a 10-month low.

The decline suggested deteriorating global economic conditions were making their impact felt, said HSBC.

Continued weak demand for labour and low stock levels, as evidenced by the survey, also pointed to a private sector that remained cautious, the bank said.

As result, HSBC forecasts economic growth to slow to 3.6 per cent next year, from 3.9 per cent this year.

Capital Economics also expects growth to drop from 3.5 per cent this year to 3 per cent next year.

"As long as problems in the banking sector linger, domestic demand is unlikely to offset a slowdown in exports," wrote Said Hirsh, a Middle East economist, and William Jackson, an emerging markets economist, at Capital Economics.