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Low Inflation Creates Real Pay Growth in the Region While Saudi GDP Grows 5.9% in Q3 and Nonoil Private Industry Expected to See 6.3% Growth This Year

Middle East : 11 January 2013

Salaries to Rise Across the Region

With inflation rates forecasted below the average salary increases for the coming year, analysts at Mercer expect real pay growth will be realized in MENA. This indicates further development in the region.

Anticipated wage increases for this year include an 8 percent increase in African businesses and a 5.4 percent rise in Middle East companies. As a result of the region’s diversity, a large variation in wage increases is expected. The Total Renumeration Survery for 2012 indicated a spread from Morocco’s 4.9 percent increase to a 10 percent increase in Egypt, much higher than those forecasted in Western Europe.

For the GCC region, increases of 5 to 6 percent were expected, with employees in Saudi Arabia realizing the highest gains. Mercer’s Business Leader, Zaid Kamhawi, noted that the wage increases have been stable in the GCC. He also stated that expected pay increases are coming in above forecasted inflation rates, resulting in genuine pay growth for employees across the region.

Businesses are reducing the focus on inflation when budgeting for wage increases, and taking account of competitiveness, market conditions, confidence and affordability instead.

Several markets in the Middle East introduced pay freezes for the coming year. Around 5 percent of regional businesses will implement these freezes, although that figure is one of the healthiest within the broader MENA region.

Middle East firms need to retain qualified talent and are experiencing healthy growth, making the real pay growth necessary. Based on data with the Mercer survey, 70 percent of businesses surveyed are expecting to increase staff in the coming year.

Saudi GDP Growth Speeds Up in Third Quarter

After shrinking in the first two quarters of this year, the GDP in Saudi Arabia grew by 5.9 percent in Q3, according to a recent report by KFH-Research. A dramatic swell in the government services sector drove growth on a year-on-year basis.

The report noted positive results from government support, including strengthening the financial position and maintaining spending levels that helped the transportation and construction sectors. Saudi GDP is forecasted at 6 percent year-on-year.

Economic growth in the kingdom increased from 5.5 percent in the second quarter to 5.9 percent in the third, driven by robust expansion in the public sector. Growth reached a peak of 7.8 percent year-on-year in the second quarter of 2011, conditions resulting from the announcement of two substantial financial gifts. Strong growth in transportation and construction, as well as loose fiscal policies, have supported the economy since then. Construction is set to grow by 8.1 percent in Q3 and transportation is expected to expand by 8.7 percent year-on-year.

Government services expanded by 13.4 percent in the third quarter, after expansion of just 2.2 percent in Q2. This rapid swell is difficult to explain and not expected to continue. It also offset the private sector’s less than impressive performance, which dropped from 6.9 percent growth in the first half of 2012 to 5.1 percent growth in the third quarter.

Manufacturing slowed down as well, keeping in line with the global trend. Despite this, the current fiscal stance of the kingdom should continue to support growth in the private sector, as employment drives in the public sector contribute to robust performance in retail and wholesale. Those sectors reported 7.2 percent growth in the third quarter.

The mining sector, which includes oil, dropped from 6.0 percent year-on-year in the second quarter to 2.1 percent year-on-year in Q3 of 2012. Because oil output rose in the first half of 2011, the 2012 numbers were calculated using a less helpful base. Output should decline only slightly this year, coming in at about 9.9 million barrels per day.

Full year GDP growth is expected to come in at 6 percent in Saudi Arabia.

Nonoil Private Sector GDP in Saudi to Grow by 6.3 Percent

Saudi Arabia is expected to experience another twelve months of robust performance in the economy. Revised data from the Saudi Central Dept for Statistics & Information reports that economic expansion was 4.7 percent in 2010, 8.5 percent in 2011 and 6.8 percent in 2012.

Economic growth for 2013 is forecasted to hit 4.2 percent, according to Jadwa Investment. Reduced oil production has driven down this figure, and Jadwa forecasted another 2.3 percent reduction in annual oil production. The oil sector experienced a 5.5 percent expansion last year, but is expected to shrink by 1.5 percent in 2013.

Rising government spending, corporate lending rates and healthy domestic consumption levels should benefit the kingdom’s nonoil sector. Jadwa senior economist Fahad Alturki noted that current fiscal policy should drive Saudi’s economy for another year, with total government spending at 31 percent of the GDP, close to the ten-year average of 30.4 percent.

Alturki also stated that economic impacts stemming from government spending will vary, depending on the nature. Increases in investment spending will result in robust performance across the nonoil private sector, with construction coming in as one of the top performers.

Other sectors that will benefit from investment spending include transportation and power and electricity.

Fiscal measures implemented in 2011 should continue to boost private consumption and contribute to growth within retail and wholesale, communications and the financial sectors. When comparing the expansion in these sectors, a large base effect needs to be considered.

Healthy growth can be seen in consumer spending indicators, such as ATM cash withdrawals and point-of-sales transactions. Cement sales are up by 10 percent when compared to this period last year, a clear indicator of increased activity in the construction sector. Profits in listed companies are also up for Q3 by 4 percent y-o-y, according to the report.

Data from the central bank reports a consistent increase in bank lending, as figures for net credit issued reached SR 125bn, a peak not seen since 2008. Due to low interest rates and dismal returns on investments, banks are leaning toward smaller companies and expanding a lending system that was difficult to access in past years.

The recent PMI also put the private sector in expansionary territory with a score of 58, according to the Jadwa report.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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