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Hot summer cools market activity
August 14, 2017, 3:13 pm
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Latest assessment of the economic health of the country by the National Bank of Kuwait (NBK) reveals that in the height of summer heat, local and regional market activity has apparently cooled off.

Dampening market sentiment even further was the recent report from the Central Statistical Bureau (CSB), which showed that Kuwait’s economy shrank by 2.8 percent in nominal terms during 2016. The CSB attributed this decline mainly to a14 percent drop in the value of output from the oil sector on the back of lower global oil prices. Though non-oil activity grew by 2.5 percent, it was still down from the 3.3 percent growth in 2015.

The NBK report revealed that inflation was significantly lower in recent months with the figure for June coming in at 1.4 percent year-on-year (y/y). This followed a revamp in the Consumer Price Index (CPI) earlier this year that rebased it to the year 2013, while also realigning weightage granted to some sectors, and changing the make-up of the basket of products surveyed each month.

The change to CPI benchmarks, which happens every few years, has led to inflation data for the three years through 2016 being slightly revised upward. Inflation in 2017 is now likely to average below 2 percent, down from 3.5 percent in 2016. Utility price hikes for the ‘apartment buildings’ sector, which are set to come into force in September, is likely to be the main driver of the 2 percent inflation projected for 2017.

According to analysts at NBK, radically lower housing inflation was a main reason behind the y/y drop in inflation in June. Housing inflation, which is dominated by growth in housing rents, moved into deflationary territory by dropping to minus 2.3 percent y/y in June. Inflation in this sector is seen to have slowed considerably from 7.3 percent y/y at its peak a year ago, in line with the softness that has been visible in the housing market over the last few years. Other sectors also saw smaller revisions in their inflationary pace over the last few months.

Though real estate activity improved during the first half of the year compared to the second-half of 2016, it still remained down 10 percent compared to a year before. The slowdown in activity was especially visible in June due to the start of summer and the advent of the holy month of Ramadan.

In June, real estate sales dropped to KD163.6 million, down 14.6 percent year-on-year (y/y), mostly due to weakness in the investment and commercial sectors. The commercial sector posted the lowest activity since October 2016 with total sales amounting to just KD10.9 million.

Meanwhile on the employment front, Kuwaitis employed in the private sector showed a modest y/y improvement, moving to 2 percent in June 2017 from the 1.6 percent a year earlier. Employment in this sector, which had been hobbled in the last couple of years due to the phenomenon of ‘phantom employment’, now appears to back on track following a clampdown by the authorities. Public sector employment growth remained steady at 2.4 percent y/y, while expat employment growth slowed to 3.8 percent y/y.

The one bright spot in an otherwise drab hot summer was the government’s approval of legislation to introduce an excise and value added tax (VAT), in line with the decision taken by all Gulf Cooperation Council (GCC) states. The proposed 5 percent VAT and excise tax is projected to generate an additional KD650 million for the government and increase non-oil revenue by a third. However, the draft law, which still has to receive approval from Parliament, is likely to face opposition from lawmakers. Analysts believe that even if the law were to be approved, it would likely not be implemented before 2019.


 

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