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New projects to boost Kuwait non-oil growth

The start-up of large projects in Kuwait’s power and transport sectors during the second half of 2013 will feed through to stronger growth in the non-oil economy, which is expected to rise from 4.5 per cent this year to 5 per cent in 2014.

The macro picture of Kuwait’s economic growth remains comfortable, with growth moderate, inflation low and high oil revenues generating vast budget and trade surpluses, according to the latest GCC Brief issued by the National Bank of Kuwait (NBK).

However, hoped-for improvements in execution of government mega projects – which would boost investment levels and catalyze activity in the private sector – have been slow to materialize, the report said.

Activity in the consumer sector – which has been the backbone of the non-oil sector in recent years – should also remain strong, supported by hikes in benefits, low inflation, and the government’s latest debt relief measure. Solid employment growth has also helped, according to the report.

Employment growth averaged 3 per cent per year in the three years to 2012, and 4.6 per cent per year for Kuwaiti nationals.

But there are challenges going forward, NBK said in the report.

While the share of employed Kuwaitis working in the private sector has continued to rise, the increase has slowed sharply in recent years. Securing rapid and sustainable private sector job growth will require both faster implementation of government projects and economic reforms that improve th economy’s long-run sustainable rate of growth.

Oil output was cut significantly in early 2013, to 2.7 millions of barrels per day (mbpd) in March from 3.0 mbpd in December. Some of this may have been a response to seasonal factors, which usually see global oil demand weaken in the first half each year.

Nevertheless, early signs are that output could fall quicker than expected as leading Opec countries look to offset supply increases elsewhere, the report said.

The real hydrocarbon GDP is expected to fall by 3 per cent this year and remain unchanged in 2014 (versus 0 per cent and -2 per cent before, respectively), it added.

This lowers the headline rate of real GDP growth to 1.3 per cent in 2013 and 2.9 per cent next year, from 6.5 per cent in 2012.

Inflation fell to a three-and-a-half year low of 1.6 per cent year-on-year (y/y) in March, and is also well down on the levels of last year. The decline has been driven by falling food price inflation, which has dropped to -0.9 per cent y/y from 10 per cent y/y in March 2012.

But excluding food, ‘core’ inflation has also remained low, standing at 2.4 per cent in March. Given recent trends in global food prices, inflation overall may now have bottomed out, and could edge higher over the coming months.

But despite the broad strength of the consumer sector, NBK expects inflation to remain in the 2-4 per cent y/y range over the forecast horizon, helped by moderate inflation rates in neighboring countries.

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