Slowdown sees UAE consumer prices fall

Food, clothing and electronics all cost less than a year ago, with strong dollar and slow growth in housing also tied to drop.

Consumer prices in June were slightly lower on average than they were a year before, according to official data released yesterday, marking a dramatic turnaround from last year's soaring prices. And although falling prices may be a welcome relief for consumers, economists say they are a symptom of a weak economy.

Those conditions have also led to unemployment and reductions in stock values and home prices. Figures from the Ministry of Economy show the prices of food, clothing and electronics falling in June versus those of the same month last year, while the growth in housing costs slowed during the same period. "The cost of doing business has gone down considerably, as commercial rents and prices of materials have dropped," said Abid Ali, 36, an outdoor advertising entrepreneur.

"But at the same time, the volume of business has also suffered, so it more or less evens out." Mr Ali, who was paying Dh350,000 (US$95,000) in rent in Dubai's Green Community, says that figure has come down by 40 per cent, which makes life "a lot easier". But although data appear to show that costs are not rising as much as in previous years, some consumers say they have not noticed a big difference.

"I have honestly not seen any reductions in Abu Dhabi for rent or anything and we manage to get by," said Tabraiz Uddin, 34, a sales representative. "We have cut down on travel expenses severely. We couldn't even go back to India, our home, for a vacation." The inflation figures, posted yesterday on the ministry's website, showed a 0.03 per cent decline in the price of a basket of consumer goods and services between June 2008 and June 2009.

Inflation was registered in the first half of 2009, but only at a relatively low rate of 3.4 per cent. The dialling down of inflation, which soared across the region in the past two years as high oil prices spread wealth through Gulf economies, has long been expected. The price of oil has declined from a high of $147 a barrel last summer to about $66 this week. Qatar, Bahrain, Saudi Arabia, Oman and Kuwait all have reported slowing inflation this year as global commodity prices dipped, property values declined and the US dollar strengthened.

Saudi inflation for June was 5.2 per cent, down from 5.5 per cent a month earlier. "Generally, these figures are what we have been anticipating," said Simon Williams, the chief economist at HSBC Middle East in Dubai. "I don't see any significant inflationary pressures coming into the UAE." The main factors pushing inflation down were threefold: a decrease in the cost of many food and clothing items, slower-growing housing costs and the continuing strength of the dollar.

World food prices have declined by 30 per cent since June 2008, according to the UN's World Food Price Index. Reflecting the global trend, prices for many food items in the UAE have declined, according to the Ministry of Economy. Vegetable prices went down 7.1 per cent in the year to June, while dairy prices declined by 4 per cent, and meat by 3.9 per cent. Fabric prices dropped by 15.5 per cent and electronics went down by 3.2 per cent.

Although the ministry figures show a one-year decline in prices of home-related items of two per cent since June 2008 and an increase in housing prices of 2.82 per cent during the first half of the year, rents and property prices have fallen sharply in some places. According to real estate agents, prices have dipped about 50 per cent in some areas of Dubai and Abu Dhabi since the peak of the property boom last autumn.

"It is becoming much more affordable to live in Dubai," said Vincent Easton, the sales director at the property brokerage Engel and Voelkers. "That has to be a benefit to the wider economy. It is increasing the spending power of consumers and fixing the hole that we used to think would be caused by an oversupply of property." The strength of the dollar has also helped push prices down. All countries in the Gulf except Kuwait peg their currencies at a fixed exchange rate to the dollar; Kuwait's is pegged to a basket of currencies weighted heavily to the dollar.

The UAE imports much of its consumer goods and labour force, and the dollar's strength means imports from non-dollar economies become cheaper, resulting in lower inflation. Many economists also point to a projected fall in the UAE's population as a reason for slowing inflation. With fewer people chasing the same amount of goods, prices typically trend downwards. The slowdown in inflation comes on the heels of years of double-digit price increases. Last year, inflation in the UAE stood at 10.8 per cent, according to Ministry of Economy figures. In 2007, inflation stood at 19.6 per cent.

"We have to recognise that this slowdown in prices comes after a five- or six-year run where prices were increasing by 10 per cent or more," Mr Williams said. "Whatever the number is [for 2009] - whether it's minus two per cent or plus two per cent - will feel like a flat inflation rate." For this year, most analysts and economists expect deflation or low inflation, with a return to modest inflation next year.

"We thought deflation would come out in the figures much sooner, given the correction in the housing market in Dubai and more recently in Abu Dhabi," said Monica Malik, an economist at EFG-Hermes in Dubai. "There are a number of other factors adding to the deflationary environment, including the stronger dollar, declining population figures and most importantly, the fall in global food prices. "So we were surprised it didn't come out earlier."

Deflation can be a destructive force, removing incentives for manufacturers to keep up production, leading to economic stagnation and falling demand. But economists say a deflationary spiral like the one that hit Japan in the 1990s is extremely unlikely in the Gulf. @Email:[e-mail] * With additional reporting by Sarmad Khan, Bradley Hope, Umika Pidaparthy and Stefani Kerschke