COVID-19 lockdowns squeeze economic activity

Different starting points

Economies across the region entered the crisis in widely varying states of economic health. Egypt’s GDP grew by 5.6% in 2019, the most in a decade, and its consumer confidence index in Q1 2020, as measured in Nielsen’s global survey shortly before the crisis struck, was at the highest since 2012 (99 points). Saudi Arabia was also in a robust place with its non-oil private sector growing by 5.2% y/y in Q4 2019, the most in six years, and its consumer confidence at a record high of 121. By contrast, Qatar experienced its first contraction in a generation in 2019, albeit by only -0.2%, as major infrastructure projects were completed and hydrocarbon production declined. Meanwhile, Dubai was facing headwinds from oversupply in its real estate sector and Lebanon was already in the midst of its most severe economic crisis since the civil war.

Implementing lockdowns

Despite the different starting points, the immediate economic impacts were similar in type across most of the region as lockdowns to prevent the spread of the virus impacted firstly the travel and tourism sectors and then, as they tightened, the rest of the non-oil economy. Meanwhile, although oil production (largely unaffected by lockdowns) surged briefly in March-April, after the previous round of OPEC+ cuts broke down, this did little to alleviate a decline in revenue due to an historic crash in oil prices.

Although broad approaches to the virus have largely coincided, there have been timing differences in the imposition and then easing of lockdowns that will likely have had a differential impact on economic indicators month-by-month. The Gulf states were among the first to respond globally to COVID-19 given their potential exposure from hub airports and expat populations, cancelling flights to China in early February. Similar restrictions were added to other destinations as a global spread began to emerge. The nearby outbreak in Iran further heightened concerns and resulted in Iraq and Kuwait being early movers to implement broader closure measures. The Saudi decision to suspend Umrah pilgrimages was a significant moment in the global response, coming nearly two weeks before the WHO declared a global pandemic on 11 March. By contrast, Egypt was the slowest mover in the region, implementing no measures prior to the WHO declaration.

By late March, however, there were widespread lockdown measures in place across the region, with many Middle Eastern countries implementing among the most stringent policies internationally, including not only curfews but, in some cases, mandatory facemasks and contract-tracking apps. At their peak, all states in the region scored at least 81/100 on the Stringency Index compiled by Oxford University’s Blavatnik School of Government (by contrast the US peaked at only 71).

Leading indicators show serious impact

Given the region’s relatively slow economic release schedule, Q1 data for major indicators such as GDP and the balance of payments will not be available until the end of June or later and by the time the full Q2 impact is known the recovery may already be well underway. However, some leading indicators gave an indication of the extent of the impact.

Monthly purchasing managers index (PMI) series, which have some correlation with non-oil GDP trends, are available for five Middle East states and show declines to record lows. All, bar Saudi Arabia, were already experiencing periods of contraction pre-crisis, with PMI’s below the 50-point breakeven level in February. The Middle East states saw declines of 11-17 points, well ahead of the (still substantial) 7-point decline in the global PMI. The latest readings, based on survey data in April, show a large gap between the weakest (Egypt and Lebanon) and the strongest (Saudi and UAE). The small uptick in Saudi Arabia’s PMI in April might be misleading because the unusual situation could be distorting the reading, for example longer delivery times, which are usually a positive indicator, are due to the lockdown rather than rising demand. More pertinent indicators, such as new orders, were at record lows.

There are several indicators of consumer demand available for April in some countries. Bahrain, for example, reported a -24% m/m decline (by value) in point of sales transactions and cheque clearing in the UAE fell by -42% m/m. Other negative signals include a -24% m/m decline in building permits in Qatar and a -1.0% m/m drop in expat employment in Oman, the only country in the region that publishes monthly labour data. Wherever data on flights, visitor numbers and hotel occupancies are available, they show record lows in April. The overall picture suggests that economies in the region contracted substantially in Q1 which has continued in Q2. Trends in these monthly indicators will help signal how solid a recovery comes in Q3 and beyond.

Two other sources of high-frequency data that will be useful in assessing the recovery are consumer prices and corporate earnings, and these also provide some sectoral insights. Most countries in the region suffered deflation in April, due to the collapse in consumption, with the sharpest declines often seen in areas such as recreation and transportation. However, some impact from the crisis was already visible in Q1 corporate earnings, although lockdowns were only in place for the latter part of that period, particularly as firms made provisions for expected losses.

PwC’s latest CFO Pulse Survey, in early May, showed that two-thirds of firms expect that it will take at least three months before a return to business as usual and Middle East firms expect to see a larger negative impact on profits this year. 40% of Middle Eastern firms expect to see at least a 25% decline in profits, compared to only a quarter of firms globally. Also more Middle Eastern firms expect to cut staff – 40% compared with 29% globally. However, a relative improvement in the global and regional epidemiological outlook during May may be reflected in slightly stronger results in the next survey.