Gulf Oil and Gas accountACCOUNT

World Economy - APR 12

Source: OPEC_RP120405 4/12/2012, Location: Europe

Industrialised countries
US
The third release of the 4Q11 GDP has confirmed 3.0% quarterly and annualized growth, the highest level of quarterly growth of the previous six quarters. Private inventories were the main driver for this number and contributed 1.9 percentage points to the 3.0%. This support from stock-building therefore needs either consumption to continue its expansion or export growth to accelerate again. With regard to private household spending, consumer sentiment has remained at higher levels than in the previous year, amid some improvements in the labour market. This, therefore, points at a continuation of private consumption growth. The consumer confidence index of the Conference Board has been recorded at 70.2 in March, only slightly lower than the February level of 71.6, which was the highest in 12 months.

The other consumer sentiment index of importance, the index of the University of Michigan, confirmed this development with an index of 74.3, only slightly lower than the February level of 75.3, which was also the highest level within the past year. The labour market continued some improvements that could have supported this development. The unemployment rate declined slightly in March again to 8.2%, the seventh consecutive month of improvement, but it should be noted that on the negative side, the participation rate has again come down to 73.3%, the lowest level in more than 50 years. Long-term-unemployment has also not improved significantly, standing at 42.5% in March, only marginally lower than February’s 42.6%. Non-farm payrolls have increased by 120,000 in March, which is still below the 12-month average to February of 190,000. While it is an improvement, it remains to be seen how long it will take for the labour market to again reach healthier levels.

The still relatively weak labour market performance is a major factor that the Federal Reserve Board (FED) has also highlighted in its recent comments. While the FED seems to be refraining from further quantitative easing measures, or other extraordinary monetary supply mechanisms, it is closely monitoring the slowly recovering economy. In a recent comment made by the FED chairman, he pointed out that while the labour market had shown signs of improvement, the recovery remains slow and needs careful attention.

At the same time, the FED has not given any indication of further monetary supply measures anytime soon, but is has highlighted several times that labour market developments remain a core-focus in its considerations of further monetary decisions. However, the current inflationary trend is holding back further supply measures, although they could again be an option when commodity prices begin to ease. Inflation has moderated over the past months but remains at high levels. After it peaked at 3.9% in September 2011, it has fallen consecutively to reach 2.9% in February, the same level as in January, which shows a stabilizing trend. The chairman also pointed at the still unsatisfactory high number of citizens that have been unemployed for more than 6 months and has highlighted this issue as one of the FED’s major concerns since these labour market participants are losing skills, which may mean the productivity of the economy might suffer in the future.

The housing sector remains mostly unchanged and shows no sign of a significant improvement. Pending home sales have declined by 0.5% m-o-m in February, after a rise of 1.9% in January, and the house price index of the Federal Housing Finance Agency (FHFA) has remained flat in January, after a rise of 0.7% in December. Existing homes sales in February remained more or less at their January level, with 4.59 million home sales, compared to 4.63 million in the previous month.

Output-related indicators improved with factory orders having shown a monthly increase of 1.3% in February, after a decline of 1.0% in January, and industrial production expanded by 4.4% m-o-m in February. The ISM number for the manufacturing sector was slightly higher at 53.4 in March, after 52.4 in February. The ISM for the services sector declined slightly but was still holding at a high level of 56.0 in March, after 57.3 in February.

The US economy shows some robustness, particularly when compared to other OECD economies as can be seen in the strong annualized growth number in the 4Q11 of 3.0%. Nevertheless, the US economy is expected not to be able to continue this momentum in 2012, given the weak labour market situation and the high public debt levels. The economy is expected to expand by 2.2% this year, but in case the labour market continues its improvements, it could see an even higher growth level.

Japan
The data coming from the Japanese economy points at an improvement. External demand has improved on a monthly base — while it is still negative on a yearly comparison — and domestic demand has seen an uptick as well. Much of the positive expectations for this year depend on the effectiveness of the latest fiscal stimulus of ¥12.1 trn that has been enacted at the end of last year and growth will depend to a large extent on its success. So far, improvements in the global economy over the past several months have supported the recovery and exports, in particular, have improved — and, via second-round effects, have had a positive effect on domestic demand. It remains to be seen what decisions will be made regarding the country’s nuclear energy strategy, as continued energy imports to compensate the nuclear power short fall have already had a significant impact on Japan’s trade balance and the effects could be prolonged.

The latest 4Q GDP revisions have shown that while the impact of the triple disaster have been severe, it has been less than previously announced, causing a GDP decline of 0.7% in 2011, compared to an earlier assumption of -0.9%. The quarterly pattern, on the other hand, became even more pronounced and volatile, highlighting the economy’s fragile situation. Growth in the 3Q11 rose by 7.1%, after two consecutive negative quarters of -6.9% and -1.2%. However, only in the 4Q11 was growth recorded at negative levels again, standing at -0.7%. The latest lead indicators point at somewhat better performance in the 1H12. Machinery orders — excluding volatile orders — rose by 4.8% m-o-m in February, after a rise of already 3.4% m-o-m in January. This is a yearly increase of 9.0%, but including volatile items, it represents a decline of 12.0% y-o-y, so the message remains mixed.

Exports were again declining in February at -2.7%, which is a continuation of a positive trend and comes after a decline of 9.3% in January. Indeed, it is the lowest decline on a yearly base since September 2011. The trade deficit was also lower than in previous months at ¥313 bn, compared to trade deficits of ¥500 bn or more in the past three months. The weakening of the yen, which started in February, has certainly been helpful for exports, falling from around ¥77/$ to almost ¥84/$ in March, before settling again at the ¥81/$ level at the beginning of April.

The domestic side of the economy has also continued improving. Retail trade numbers have risen by 3.5% y-o-y in February, after an increase of 1.8% y-o-y in January. This February level was the highest expansion since August 2010. It was supported by strong motor vehicle sales of 21.4% y-o-y. Car registrations, supported by tax incentives and stimulus measures, in March were growing at a stunning 74% y-o-y, after a rise of already 23.8% in February.

Industrial production is still showing a mixed trend with a decline of 3.9% y-o-y in February, after -1.0% y-o-y in January, while the leading Purchasing Managers Index (PMI) indicates an expansion of the sector with the PMI for manufacturing standing at 51.1 in March, after 50.5 in February, according to Markit. More important — at least when it comes to GDP contribution — is the services sector PMI increased to 53.7 from 51.2 in February, with both moving up the composite PMI to 53.2, a significant rise from its February level of 51.2.

So, taking the most recent developments together, it should be concluded that while the results still seem mixed, highlighting the fragile state of the economy, and with some areas still in decline on a yearly comparison — particularly exports and industrial activity — there are signs of improvements, particularly in the lead indicators, which are supported by improving exports and better domestic demand. This leads to a currently unchanged forecast of 1.8% GDP growth for 2012. Further signs of improvements will be needed for any further upward revision.

Euro-zone
Since the beginning of the year the confidence into the Euro-zone has increased, yields for ailing Euro-zone countries have fallen to more sustainable levels in the first three months and the Euro has moved back again to trade comfortably above the $1.30/€ level. Major support came from the European Central Bank (ECB), which injected more than €1 trn in two rounds of extraordinary money supply via its three year long-term refinancing operation (LTRO).

It provided the first amount under this at the end of last year and the second just at the end of February. This helped to support the balance sheets of banks by making available cheap money but also incentivized banks to buy sovereign debt bonds and thereby bring down their yields. Although this money was supplied and was able to calm markets, worries re-emerged and yields have risen again, particularly in Spain and Italy.

Spanish 10-year yields are back at almost 6% and Italy’s risk-premium is now only a fraction lower, putting the Euro-zone sovereign debt crisis prominently back on the top of the agenda. While Italy was bound to pay more than 7% at the end of the year and while yields although still at high levels — are considerably lower at below 6%, Spain is now almost back to where it stood at the end of the year. This comes despite the Euro-zone economies agreeing to an increase of the provision of their emergency facilities to around €800 bn, a significant step towards the G20’s request to shore up its own firewall before the International Monetary Fund (IMF) will be approached for additional support. Furthermore, private holders of Greek debt have agreed to accept the offer made by the government. All this has not kept investors from asking for a higher risk-premium and, on the contrary, the German Bund yields have reached a new low of 1.63% in the secondary market.

This development highlights two important aspects: first, that the division between the core Euro-zone economies and the peripherals is increasing and, second, that as long as the sovereign debt issues are not solved, worries will always re-emerge and real economic growth will be suppressed until this has all been sorted out. The high debt service in many economies in combination with soft tax revenues, record-levels of unemployment and muted domestic consumption are holding back any expansion. The most recent data from the real economy supports this. Austerity measures in most of the peripherals are causing a significant decline.

It will therefore be very important to see how the upcoming political events will further shape the handling of the current challenges. First, there will most probably be elections in Greece soon and, after this event, it will be seen how the structure of the recently agreed bail-out package will continue. It cannot be ruled out that there will probably be some changes demanded by a newly elected government, but this remains to be seen. Moreover, there are presidential elections in France in April and May as well, which will probably bring some changes to the political landscape of the Euro-zone. Furthermore, Ireland has announced that it will hold a referendum on the fiscal union of the European Union (EU) that had been agreed on in December.

In the meantime, indicators remain in the negative zone. Industrial production was in decline at 1.3% y-o-y in January for the second consecutive month. Even more worrying are manufacturing orders, which have plunged by 4.3% y-o-y in January, after a decline of 0.1% in December and -2.3% in November, marking the third consecutive month and indicating a slow-down in manufacturing. While Germany has performed much better compared to its Euro-zone companions, the order index has also come down by more than 6% y-o-y for both December and January, which is not a positive indicator.

This negative development, with some slight improvements, is also reflected in the PMI numbers provided by Markit. The manufacturing PMI stood at 47.7 in March, again considerably lower than the 49.0 from February, while the services sector PMI, with its much higher weight in the economy, was recorded again at 49.2, which is below the growth indicating level of 50 but higher than the February number of 48.9. Moreover, the labour market is feeling the consequences of the economy’s weakness not performing well, with an unemployment rate hitting new highs of 10.8% in February. Youth unemployment stood at 21.6%, the highest level on record, with Spain ranking the highest again at 50.5%. Consequently, retail trade in the Euro-zone has been negative for all months since May 2011 with -1.7% y-o-y in February.

The evidence is relatively strong that the weakening of the Euro-zone will continue in the coming months. Taking this into consideration, the forecast for 2012 GDP growth was revised down to -0.3% from -0.2% in the previous month.

Emerging markets
The outlook for the global economy is improving, although we expect lower world GDP growth this year of 3.3% compared to last year’s 3.6%. The US economy has looked more resilient in recent months, and with solid job gains and consumer credit expanding exceptionally strongly, its indicators are consistent with trend-like growth. A global high-tech rebound is likely to help lift growth rates of Japan and Emerging Asia (JP Morgan, 6 April 2012) and with peripheral economies in the EU experiencing deflation, the ECB can opt for a more aggressive monetary policy. Indeed the ECB injected more than half a trillion euros into regional banks in late February as part of its second LTRO.

This brings the total amount of such loans to more than €1 trn, following an injection of a similar amount in December. China's economy has continued to slow, with its foreign trade balance in deficit for the first two months of the year (EIU, April 2012). It is expected, however, that the slowdown will be managed successfully and that China's economy may grow by around 8% this year, even though official GDP growth for the medium-term is set to be 7.5%. In his "State of the People's Republic" address to China's legislature on 5 March, Premier Wen Jiabao set the annual growth target for 2012 at 7.5% — the first time the official benchmark has been set below the 8% level long viewed as the minimum needed to create enough jobs and ensure social stability. In its current five-year plan, the government has set the annual growth rate at 7%.

In Eastern Europe’s economies, spill-over from the Euro-zone crisis has blunted growth prospects. The sovereign debt crisis in the Euro-zone, the Eastern Europe’s key export market, has reduced growth prospects and raised doubts about the medium-term outlook. A recession in the Euro-zone in 2012 could act as a sharp brake on economic activity in Eastern Europe, due to weaker trade, investment and financing through banking channels. Domestic demand generally remains weak in Eastern Europe, given high unemployment, excess capacity in some cases and the inability of governments to provide fiscal stimulus.

External bank loans and foreign direct investment, both of which helped to drive growth in the pre-crisis years, are likely to be constrained in 2012 (EIU, April 2012). If the credit squeeze becomes more severe, this would raise the spectre of another recession in Eastern Europe as several countries in the region, including Hungary, Slovenia and Croatia, are already believed to be on the brink of a recession. However, the brightening prospects of the global economy and the accommodative liquidity policy of the ECB, as sentiment towards the euro improves, and the resilience of the German economy are all expected to contribute to the recovery of economic activities in Eastern Europe.

In Asia two different trends of economic growth can be detected: While export-driven economies such as Singapore, Hong Kong, Malaysia, Taiwan and, to a lesser extent, Sri Lanka have slowed in recent months, mainly due to sluggish demand in the West (particularly the EU), countries with strong domestic demand — including China, India, South Korea, Indonesia and the Philippines — might be able to cushion their economic growth from the negative impact of external factors by proper increases in domestic absorption. Although recent data suggest recovery in industrial production of export-oriented emerging Asia, Chinese economic growth will be important as Asia’s largest economy, which is expected to act as the region’s engine of economic growth, slows down. In Thailand and Australia, which were both affected by flooding in 2011, output is seen as returning to normal levels. Pakistan also falls into this category, as its economy will be buoyed this year by a recovery following the flooding that affected the country in 2010 and 2011 (EIU, April 2012).

Following a strong rebound in 2010, growth in the Latin American region slowed to 4% in 2011. We forecast a further slowdown to 3.4% in 2012, amid an outright contraction in the Euro-zone and below-par growth in the US. Growth is expected to accelerate in 2013 due to continuing sound macroeconomic policies, resilient domestic demand and a recovery of economic activity in the OECD area. It is worth noting that economic growth in South American countries depends also on China's demand. On the other hand, historically low OECD interest rates, coupled with an improving investor perception of the region's potential, will continue to benefit the larger economies and those that are well-integrated into the global financial markets. The episode of exchange rate volatility which hit Latin American emerging markets (EMs) in September 2011 highlighted the vulnerability of the region to shifts in market sentiment, given their large external financing requirements and the volatility of global portfolio flows (EIU, April 2012).

In addition to the risks arising from an uncertain global economic outlook, Latin American policymakers will have to strike a balance between supporting domestic demand while keeping inflation under control amid price pressures stemming from high food and oil prices. The appreciation of currencies due to capital inflows will reduce the manufacturing competitiveness while in countries such as Brazil, which is set to become a large oil producer and exporter, the problem of "Dutch disease" will represent a challenge.

The region's external balance sheet is stronger than it used to be. External debt is lower relative to GDP, and exports and foreign exchange reserves are at record levels. Even so, growth in import bills, fuelled by domestic demand and by strong local currencies, will exceed export revenue growth, with resulting large current-account deficits in the region — even for commodities exporters. This situation is particularly problematic for Argentina, where current-account surpluses have been a pillar of stability in the last decade, given the government's limited access to international capital markets, use of foreign reserves to repay its external debts and vulnerability to capital flight.

Economic growth slowed in the Middle East and North Africa (MENA) region in 2011 as a result of political upheaval and civil unrest. The countries most affected by unrest — namely Tunisia, Egypt, Syria, Yemen and Libya — saw their economies slow sharply or contract. Assuming no further serious outbreaks of political upheaval outside of Syria, a recovery will gather pace in 2012, supported by still-high global oil prices. However, weaker EU demand will constrain North Africa's exports and lead to lower workers' remittances from Europe and tourist inflows. Growth prospects in Egypt will also be hampered by domestic political instability. Offsetting this, regional growth in 2012 will be supported by massive infrastructure and industrial development in Saudi Arabia, expansionary fiscal policy across the Gulf Co-operation Council (GCC) states and a bounce-back in Libyan growth (EIU, April 2012).

Despite the overall weakness in the global economy, fundamentals have been improving in many EMs in recent weeks. Nevertheless, policy mixes adopted in Ems to support economic growth differ significantly according to their economic circumstances. While in many Central and Eastern European EMs tight monetary policy is still on the agenda to curb elevated inflation, in Asian and Latin American EMs a more accommodative monetary policy is being adopted based on concerns over sluggish economic growth.

According to JP Morgan (6 April 2012), inflation in Latin America has been moving lower, allowing policymakers to turn to economic growth policies. The Central Bank of Brazil is expected to cut 75 basis points (bp) from its policy interest rate in its meeting on 18 April. This will come as reinforcement for Brazil’s fiscal stimulus announced this week. A series of initiatives totalling 1.5% of GDP are envisaged to shield domestic industries from external competition. India’s central bank, the Reserve Bank of India (RBI) is also expected to cut its policy rate by 25 bp at its next meeting of policy review on 17 April. India’s rupee is expected to remain under pressure due to current account and government deficits. Meanwhile, China’s National Bureau data indicates a strong improvement in March manufacturing PMI.

This looks surprising as the latest HSBC China manufacturing PMI published on 1 April indicated a sharp decline in the country’s manufacturing output in March 2012. In Russia, investment demand remained firm in February while consumption growth looked to be losing momentum. The labour market is also tight given an unemployment rate at 5.9% and real wage growth of 13.3%, both on an annual basis JP Morgan, 30 March 2012).

The government of Brazil announced a broad-based fiscal stimulus package in early April comprising some 30 initiatives. The package includes tax exemptions, policies to protect manufacturing from external competition and tightening trade regulations. This fiscal package appears to be more substantial than expected earlier this year and is expected to amount to 1.5% of GDP or R$60 bn ($ 37.3). Despite the size of the fiscal stimulus, it is difficult in this stage to estimate its impact on Brazil’s economic growth, which has been declining since 4Q11. Expansion of government spending by as much as 1.5% will make it difficult to achieve the primary surplus target of 3% of GDP without an extraordinary increase in public sector revenues. On the other hand, a large expansion of fiscal spending will exacerbate keeping interest rates low for a long period. This would make predictions of the effect of Brazil’s policy mix on the economy even more complicated as it is reported that the Central Bank of Brazil (BCB) is preparing to cut its policy rate as much as 75 bp at its meeting on 18 April (JP Morgan, 6 April 2012).

This gives a strong signal that the easing cycle of monetary policy that began in August 2011 might still go further. Monetary easing is only beginning to have an impact on demand and recent data indicates an early stage of recovery in GDP growth. Brazil’s recovery is reflected in trends in industrial output and retail sales. There is a risk, however, that the BCB’s domestic and external assumptions overestimate the deflation process in Brazil and, consequently, may be forced to raise rates sooner or by a greater degree than expected to curb inflation. Otherwise, it will risk losing confidence in its determination to achieve the core inflation target of 4.5%. According to the BCB, inflation expectations are running at 5.3% in 2012.

The government has raised R$24 bn ($14 bn) through the sale of licenses to operate three of Brazil’s busiest airports in an auction that was aimed at accelerating investments ahead of the 2014 World Cup and the 2016 Olympics. Investments in Brazil’s aging airports has struggled to keep pace with the growth in air travel that has doubled in the past decade as household incomes have increased significantly (EIU Country Report, March 2012). Capital goods have had a strong performance in 2011 with a 3.3% increase over 2010. Retail sales are also expected to continue to rise as minimum wages are raised by as much as 14% as of January.

In January, the trade balance was negative (minus $1.3 bn) due to growing imports, which imply a recovery in domestic demand. The capital market, however, developed on a more positive note assisted by the global economic recovery. Petrobras, the state owned oil company, sold $7 bn in bonds on international markets. This has been Brazil’s largest corporate debt offering ever.

China
In February the government published a circular on reform of the household registration (hukou) system. The document suggested that population movement to large cities will still be controlled but that migrants will now find it easier to register in smaller cities. In medium-sized cities, they will be able to register for a residence permit after working for three years and paying social security insurance for one year (EIU Country Report, April 2012).

China’s premier, Wen Jiabao, outlined the government’s principal economic goals in 2012 at the National Party Congress (NPC) in March. These include real GDP growth of 7.5%, eventually moving closer to 7% annual GDP growth in accordance with the 12th five-year plan. Also, the official inflation target would average around 4% this year. The CPI in February was 3.2% on annual basis, down from 4.5% in January. The total volume of imports and exports is projected to rise by around 10%, while the broad money supply (M2) will increase by 14%. This is lower than 2011 money supply projections of 16%, suggesting a continuation of the government’s tight monetary policy. Government expenditures on education, social security and health increased in 2011 by 27.8%, 22.6% and 33.1%, respectively. Defence spending was up by 11.4% although it is believed that this substantially underestimates expenditures in areas such as arms procurement.

Following subsiding inflationary pressures, which are believed to have peaked late last summer, the government has been easing its monetary policy mainly by reducing its bank reserve requirement ratio and leaving the policy interest rate unchanged. The ratio was lowered to 20.5% for large banks in November 2011. The Central Bank also set the loan-to-deposit ratios for two of China’s largest banks — the Industrial and Commercial Bank of China and the China Construction Bank — at 63% and 70%, respectively, a slight increase compared to 2011 ratios. Two important reports submitted to the NPC in March called for additional economic reforms. The first report, jointly prepared by the People’s Bank of China (PBC) and the World Bank, called for reforms in farmers’ land rights and labour mobility, as well as the privatization of state- owned enterprises. The second report, prepared by the head of PBC’s Survey and Statistics Department, called for a gradual opening up of China’s capital market over the next 10 years.

Recent data continue to suggest that the Chinese economy is slowing. Industrial value-added output was up by 11.4% on an annual basis in February, the lowest rate in two years. Electricity generation also increased by a modest y-o-y growth of 7.1% in the first two months of 2012. Cement production and car retailing have both performed poorly, and rising inventories of copper and air-conditioners, together with a trade deficit in February, all paint a gloomy picture of the Chinese economy in 2012.

However, the government’s stance at the NPC did not imply particular concern over the recent downturn, suggesting that it remained under control. In addition, surveys of business confidence suggest a brighter picture. The official PMI stood at 51 in February. For March, according to China’s National Bureau of Statistics, this index improved significantly to 53.1 as shown in Table 3.3 and Graph 3.3 below.

India
The new all-India CPI inflation measure surged to 8.8% in February from 7.7% in January, suggesting that retail price pressures firmed that month (JP Morgan, 30 March 2012). However, core inflation has been falling to around 6%. With the reduction of budget deficits targeted by the RBI is likely to cut rates by 25 bp at the April review of policy, provided that core inflation continues to moderate in March.

Considering India’s slowing economic expansion, runaway public spending and a rising subsidy bill, the country’s finance minister was expected to announce some hard decisions in his budget speech for fiscal year 2012-2013 on 16 March. However, at the event, the budget did not indicate any significant policy changes or radical solutions; instead, some tax increases were introduced. Since the government’s assumed oil price did not come true, and given substantial fuel subsidies, the government’s deficit increased to 5.9% of GDP from 4.6%.

GDP data for October-December 2011 released by the Indian government at end of February 2012 showed that economic growth had slowed to 6.1% on an annual basis compared to 6.9% during the previous quarter. Growth in three broad sectors remained strong: electricity, gas and water supply (up by 9%); trade, hotels, transport and communications (9.2%); and financing, insurance, real estate and business services (9%). However, mining and quarrying declined by 3.1% and manufacturing grew only by 0.4%.

Russia
The Russian economy was affected by a strong growth in investment demand and a tight labour market in February. Demand for investment grew by 15.1% while unemployment remained flat at 5.9%, slightly below the neutral rate estimated (6 6.5%) by JP Morgan. At the same time, consumer demand growth has been losing its momentum. The surprise decline of -1.2% in retail sales in January was not fully covered by a gain of 0.9% in February. Industrial production in February rose by 6.5% on an annual basis compared to 3.4% in January. In January, the economy slowed according to Economy Ministry estimates. On an annual basis, the Russian economy was 3.9% larger than the same month a year earlier and below the 2011 average of 4.3% growth.

Industrial output growth recovered in January after a weak December, with production rising by 1% m-o-m. Manufacturing output increased by 1.3% m-o-m and 4.8% y-o-y. The latest industrial survey suggests steady albeit modest industrial output growth. Nearly 80% of manufacturing companies in the survey reported that they expected to increase their output over the next three months. The federal budget deficit amounted to $8.3 bn in the January-February period, equal to about 3% of estimated GDP. A cash-flow deficit in the early months of the year is a rare phenomenon because of the seasonal nature of expenditures, which normally only pick up during the second half of the year (EIU Country Report, March 2012).

OPEC Member Countries
Saudi Arabia’s GDP expanded 6.6% in the 4Q11 from a year earlier on additional government spending and higher oil prices. The government sector grew by 3.6% and the private sector by 9.9%, the Central Department of Statistics and Information in Riyadh said on its website. The oil industry has expanded by 6.1%. According to a recent report by Standard Chartered, Saudi Arabia entered 2012 with positive fundamentals supporting growth due to high oil prices, together with substantial government spending and ample banking-sector liquidity.

The report expects that public expenditure on non-oil infrastructure projects is likely to be 7% higher than last year. The oil sector is likely to be slightly higher than in 2011, with most of the growth coming from the non-oil economy. The 2012 budget allocates $45 billion to the education sector, including 742 new schools and 40 new colleges. Health care is allocated $23.1 billion and includes 17 new hospitals, in addition to the 130 under construction, it stated. Infrastructure spending includes $9.4 billion for transport, and projects include the expansion of a number of the country’s airports and the construction of close to 4,000 km of roads.

The UAE economy is moving in the right direction and Dubai looks confident that it can repay about $10 billion in debt due this year. Inflation in the UAE fell by 0.44% in February, compared to January this year, while increasing by 0.56% on a y-o-y basis, mainly because of food inflation, according to the data from the National Bureau of Statistics. Inflation in the country is expected to remain under 2% in 2012, according to the Ministry of Economy, On the other hand, independent analysts predict the inflation rate might be 2.4% while it was 1.6% last year.

Oil prices, US dollar and inflation
The US-dollar was almost flat against the euro, the pound sterling and the Swiss franc in March, while compared to the yen it gained considerably after the Bank of Japan (BoJ) had begun in February to decisively manage its exchange rate again. Compared to the yen, the US dollar managed a gain of 5.2%. This comes again after it had risen already by 1.8% in February. Against the euro, it gained 0.2%; compared to the Swiss franc, it rose by 0.1%; it lost 0.1% against the pound sterling. With regard to the euro, the US dollar stood at $1.320/€ in February, compared to a January rate of $1.3221/€. Versus the yen, it averaged a rate of ¥82.435/$ compared to a February level of ¥78.392/$.

Since the beginning of the year, the euro had managed to regain momentum; however, it started to weaken again at the beginning of April, amid re-emerging worries about the financial health of Spain and Italy. In contrast to this, the US economy is performing better than expected and it seems that currently the pressure for the euro to decline is increasing. Compared to the Japanese yen, developments in the US dollar have been more dramatic, since for the second time in many months, it managed a considerable gain — of more than 7% — against a weakening yen since its lows in January, pushing the exchange rate again considerably above the ¥80/$ level.

In nominal terms, the OPEC Reference Basket price gained $5.49/b, or 4.7%, from $117.48/b in February to $122.97/b in March. In real terms, after accounting for inflation and currency fluctuations, the Basket price rose by 5.2%, or $3.74/b, to $75.97/b from $72.23/b (base June 2001=100). Over the same period, the US dollar rose by 0.6% against the import-weighted modified Geneva I + US dollar basket, while inflation increased by 0.1%.*

* The ‘modified Geneva I + US$ basket’ includes the euro, the Japanese yen, the US dollar, the pound sterling and the Swiss franc, weighted according to the merchandise imports of OPEC Member Countries from the countries in the basket.



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