LEBANON STRUGGLES WITH PRIVATE SECTOR SPENDING.

PositionUtility and housing costs are disproportionately high, which hurts discretionary spending

Lebanon's economy has traditionally been driven by public sector spending, but dynamic private sector expansion will be needed in order to emerge from the quagmire of economic stagnation experienced in recent years. Average GDP growth from 2001 through 2003 will be less than 1.5 percent, which is well below the 5 percent needed to make a significant improvement in living standards.

Income and expenses are out of whack in Lebanon. Housing and utility costs are disproportionately high for the average wage earner. That situation undermines discretionary spending, forcing households to dedicate the great majority of their earnings to covering the basic necessities of life.

Growth in consumption of durable goods will be highly concentrated in Beirut during the upcoming year. Overall urban consumption of durables should rise in the range of 1 to 3 percent during the first half of the year, before advancing to the range of 3 to 5 percent in the second half.

Sales of high-end durables should benefit slightly from recent currency stability and the steady slide in bank interest rates through 2002. Nevertheless, depressed consumer confidence will lead most households to delay major purchases until absolutely necessary. Until unemployment drops well below the current level of about 15 percent, it will be very difficult to achieve sustainable upward momentum in high-end spending.

Household consumption of non-durables will rise slowly through most of 2003, with growth not exceeding 2.5 percent for at least the first three quarters of the year. Given the inadequacies of Lebanon's agricultural production, demand for imported foodstuffs should remain firm, with year-on-year growth approaching the 5 percent mark toward year's end.

The Achilles heel of Lebanese industry continues to be its inability to attract private sector investment. High production costs and regional instability are the two greatest barriers to attracting foreign direct investment. The Hariri regime recently promised to implement programs that will bring down the cost of doing business in Lebanon. However, that will not be enough to significantly boost industrial demand for capital goods during the first half 2003.

Look for capital goods orders to be sluggish into the second quarter of the year, before rising to about 5 percent year-on-year...

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