Fears over structural challenges of indebted European countries and a weak US housing market has caused forecasts to moderate from the global growth rate of 4.8 percent in 2010 to a forecast of 4.2 percent in 2011 and 4.5 percent in 2012.
In the oil exporting countries of Saudi Arabia and the rest of the Middle East strong growth and rising inflationary pressures have resulted in an upturn in domestic consumer demand and a surge in business sentiment in 2011. The composite index for hydrocarbons moderated to 49 from 51 in Q4, 2010 due to the level of current selling prices.
The BOI suggests hydrocarbons will hold steady for Q1, 2011. The average oil price of OPEC basket was $88.50 per barrel in December, the highest monthly average in two years. The BOI score for level of selling price decreased to 48 in Q1, 2011 compared to 65 the previous quarter. Net profits expected by industry players have improved to 50 against 46 in Q4, 2010. The BOI for number of employees in the sector has also increased to 48 from 28 for the same period.
The composite index for non-hydrocarbons rose to 65, an all time high and an increase of 16 points from Q4, 2010's readings of 49, taking sentiment to a nine-quarter high.
"The outlook for Saudi Arabia in all sectors is very optimistic. Despite hydrocarbons found to be moving sideways we expect the oil price to remain bullish despite some investors who might pause for the price to push back to $90 a barrel. The Saudi economy is primarily strong in the infrastructure sectors driven by oil prices and significant increase in demand flowing into employment and profits," Phil Strange, chief financial officer, D&B said.
The Saudi economy is expected to grow by 4.5 percent in 2011 on the back of strong crude prices, improving business confidence and government stimulus particularly through investment in infrastructure. The nonoil sector is also expected to grow by 4.6 percent in 2011, while oil sector growth is expected at a rate of 4.3 percent.
Said Al-Shaikh, senior vice president and group chief economist at NCB, said that the three sectors of housing transportation and food were to blame for the increase in Saudi inflation rates. "Looking at the components of the causes of inflation in the Kingdom, food prices, rents and transportation account for the largest contribution to rising rates. In my opinion, to reduce inflation, housing would be the component to tackle. The government could obtain loans from the Real Estate Development Fund to provide the current 600,000 applicants waiting for loans with homes and reducing demand. Secondly, the newly established housing committee could build houses and apartments and sell them to low and middle income families at reasonable prices to reduce demand and help prices and inflation come down," he said.
In addition, Al-Shaikh stated that he expects that the mortgage law likely to go into effect in 2011, which would also help ease the high demand for housing units and increase in inflation.
Outlook for manufacturing in the Kingdom is among the most optimistic with respect to demand conditions in Q1, 2011 with 45 percent of Saudi firms saying they plan to invest in business expansion in the coming year.
The global construction sector has a mildly bullish outlook with the Saudi construction also having a very positive outlook going into 2011.
The BOI net profits stands at 82 compared to 63 in Q4, an increase on upbeat expectations of profitability. BOI for numbers of employees increases by 15 points to 66. Level of stock gained 2 points to 60. The biggest concerns in the construction industry are the cost of raw materials and a shortage of skilled labor.
The trade and hospitality sector is set to grow in Saudi Arabia with inbound religious and business tourists increasing. The Transport sector in Saudi Arabia is expected to grow by 6-10 percent annually, driven by aggressive costs of new roads, railroads, and integrated community development. The composite index is up in this sector by 25 points to 64, its highest level.
Asked if the Kingdom should de-peg, Al-Shaikh said, "I would be reluctant at this time to de-peg from the dollar. I don't think that it would be an easy decision because the Kingdom would have to live with the effect for a very long time. This strategic decision should not be made based on volatile conditions or press of foreign exchange rates."
