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Qatar, along with the UAE, is expected to witness deflation this year mainly as a result of a fall in housing prices, says investment bank, EFG Hermes.
"The UAE and Qatar will see the greatest reversal in inflation trends, from the highest regional inflation rates in 2007 and 2008 to deflation in 2009 due to a fall in housing prices," the bank says.
Isn't deflation worse than inflation?
Although deflation is generally seen as negative and undesirable in economic terms, it may not be detrimental, given the nature of the GCC economies, the bank says, adding "we do not forecast to see a sustained deflationary environment building or a deflation spiral."
True UAE and Qatar would witness deflation, but the economic realities on the ground are diametrically opposite ensuring that Qatar will continue to post solid non-oil economic activity, while the UAE will sustain a structural correction.
In Qatar, the fall in the rental prices is mostly due to a marked increase in housing supply entering the market in 2009. In the UAE, it will be a result of both the correction in the property sector along with the increased supply in housing.
Qatar's inflation fell 0.79 per cent in June mainly on easing of rents and lower prices of food as well as garments and it was down 2.6 per cent since January this year, according to the Qatar Statistical Authority.
The UAE's July inflation had risen 0.39 per cent mainly on price spikes in household appliances and food items, according to the latest data from the economy ministry.
Meanwhile, annual inflation in Bahrain increased to 2.9 per cent in July from 2.7 per cent in June, official data shows.
The consumer price index of the kingdom stood at 109.4 points at the end of July, compared with 106.3 points a year earlier, the Central Informatics Organisation (CIO) says.
Omani inflation slowed to a four-year low of 1.8 per cent in July, the economy ministry says.
The inflation rate fell from 2.9 per cent in June. Inflation in the Sultanate was last below 1.8 per cent in August 2005.
Saudi Arabia's inflation is expected to keep falling after it reached a two-year low of 4.2 per cent in July.
The sharp fluctuations during the first half of this year in the price of oil, the kingdom's economic mainstay, must prompt it to diversify its revenue sources further, says Muhammad Al Jasser, governor of the Saudi Arabian Monetary Agency (Sama).
"It is a must to continue diversifying the sources of revenue and reduce reliance on oil ... by further granting the private sector a bigger role in the national economy," Mr Al Jasser says, citing the fluctuations in the price of oil, now trading at about half its record $147 price per barrel of July last year.
Annual inflation in Saudi Arabia has plummeted from a record 11.1 per cent a year earlier due mainly to a slowdown in the rise of home rents and food prices.
"It is expected that this (inflation) decline will continue, which would create better chances for growth and financial stability," Mr Al Jasser says.
The drop has coincided with a dramatic slowdown in lending, especially to the private sector amid the global economic slowdown and concerns over the solvency of two major private conglomerates.
Mr Al Jasser says that lending to the private sector rose 27.1 per cent last year. At the end of July, the rate fell to 3.6 per cent.
The global financial crisis has had a "limited impact on the Saudi economy and Saudi banks have not been tangibly affected by it thanks to Sama's conservative policy in supervising and controlling financial institutions".
As Qatar and the UAE move from inflation toe deflation, what are the factors that give room for optimism?
Government spending, a flexible labour force and the importance of external factors determining tradable prices help the GCC economies from inflation or deflation not becoming entrenched.
Wider imported inflation was moderating with the overall strengthening of the dollar from 2008 levels and weaker inflation rates in exporting countries to the GCC.
Also, food prices are falling in the region in line with the fall in global commodity prices.
EFG Hermes expects the downward pressure on prices to provide a key support to private consumption in 2009 in the region.
The fall in rental prices is also positive for the international competitiveness of the GCC countries, especially for the UAE and Qatar which have seen double digit inflation for a number of years.
If managed carefully, the slowdown in growth could be turned into an advantage, especially as the GCC economies have been overheating over the past several years.
Growth itself was triggering runaway inflation. In that context a moderate slowdown, be it due to the financial crisis or otherwise, is seen as more than welcome.
