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Fiscal reforms to impact consumer spending
September 8, 2016, 9:39 am

Consumer spending has long been a robust and reliable source of economic growth in Kuwait; while this might remain so for the rest of 2016, newly implemented subsidy cuts and other fiscal reforms could soon begin to take a toll on consumer sentiment in the country.

The latest economic report from Kuwait’s leading commercial bank, National Bank of Kuwait (NBK), which looks at consumer confidence, spending and inflation among other factors, shows that steady growth in employment and salaries in the government sector have helped maintain consumer buoyancy, especially among Kuwaiti households.

According to data from the Public Institute for Social Security, Kuwaiti household income from salaries remained resilient in 2015 growing by around 3.3 percent, while employment growth remained relatively steady at 3.1 percent during 2015.

In addition, government hiring, a key source of employment among Kuwaitis, remained firm adding nearly 20,000 new jobs during the year. And, with no likelihood of any public sector salary or wage cuts in the immediate future, and impacts from subsidy reforms expected to be gradual and negligent, consumer spending and household borrowings among Kuwaitis remained high.

However this optimism is not shared by the wider populace, where fallouts from recent fuel price hikes and announced increases in utility charges are already dampening spending among many people. This negative sentiment, reflected in businesses across various sectors of the economy, is only likely to exacerbate in the coming year, when the effect of announced increases in energy prices begin to impact everything from grocery bills to rents and services.

The NBK report shows that while inflation continued to ease somewhat over the last year or so, headline inflation and core inflation, which excludes food prices, both remained largely unchanged year-on-year at 3.1 percent and 3.5 percent respectively in July 2016.

One reason why food price inflation remained soft was because global food prices slipped back into deflationary territory, which allowed local food inflation to remain steady at 1.2 percent y/y. However, once the fuel hikes implemented in September come into play, food prices could be one of the early casualties. Also, services, which have been another main source of reduced inflationary pressure, with inflation in this sector declining to 1.7 percent y/y in April 2016, could see a reversal with recently announced reforms.

The NBK report noted that if inflation across most components remains in check, inflation could remain around 3.0 percent in 2016, slightly lower than the 3.3 percent recorded in 2015. The key words are ‘remain in check’; unless the administration exerts a serious effort to control or rein in food price hikes, the coming months could witness a sharp rise in inflation as food and other prices in the market begin to soar.

Another section in the NBK report highlights furnishings and household maintenance, where inflation was only a tick lower in July, and inflation in clothing and footwear which remained weak. After stabilizing for about four months straight, inflation in the furnishings and household segment came in slightly lower in July at 2.6 percent y/y, while inflation in clothing and footwear costs saw some gains in July, but remained weak at 0.5 percent y/y. However, these lower inflation figures could be attributed to a stronger dinar and more frequent and longer seasonal ‘sales’ periods, which continued to cap costs in this segment.

Meanwhile, inflation in the ‘other goods and services’ category jumped in July. After months of subdued rates, inflation in this component, which is mostly comprised of imported goods such as personal care products and jewelry, accelerated from 0.5 percent y/y in June to 1.2 percent y/y in July. While this jump could be explained by higher jewelry prices, following a rally in gold prices in July, it is also possible merchants have begun factoring in potential increased costs into their prices.

Inflation in restaurants and hotels remained unchanged from June’s seven-month high of 4.1 percent mainly due to seasonality. But demand in this component, particularly in the ‘restaurants and cafes’ subcomponent, is only typical of summer season when it normally jumps, especially during the Eid breaks.

However, the biggest impact of recent fuel hikes is likely to be felt in the transportation sector where inflation, which has been trending lower since 2009 on the back of softer growth in both car prices and airfares, could face a remarkable reversal in the coming months. Though the impact from fuel hikes implemented in September are only beginning, and the proposed energy price increases are yet to become tangible, the influence these subsidy cuts and reforms are having on consumer sentiment cannot be wished away and it is already having an impact on businesses across the country.

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