The UAE economy is predicted to return to long-term growth in 2018 and beyond

The UAE economy is predicted to return to long-term growth in 2018 and beyond

UAE’s economic growth to gain pace

The series of measures rolled out by the emirate to diversify its economy away from oil, and to stimulate investment have already started to reflect positively in economic data

01 August 2018

The UAE economy is set to fast track growth this year and in 2019 after a difficult 2017 when growth slowed to a seven-year low of 1.5 per cent.

According to the The Institute of Chartered Accountants in England and Wales (ICAEW), the UAE’s gross domestic product (GDP) is expected to accelerate to 2.6 per cent growth in 2018 and to around 3.8 per cent in 2019.

However, the accountancy and finance body warned that general prices are expected to increase as inflation will rise to 4 per cent this year, driven by the introduction of 5 per cent value-added tax (VAT) in January.

According to ICAEW’s Economic Insight: Middle East Q2 2018 report, produced by Oxford Economics, ICAEW’s partner, the UAE’s growth will be primarily driven by recovering oil prices, an expansionary fiscal stance at the federal and emirate levels, a buoyant trade and tourism environment and a pick-up in investment ahead of Expo 2020 in Dubai.

FocusEconomics, another research firm, agreed. “Aside from a large infrastructure push—particularly as Dubai prepares for Expo 2020—the country will benefit from the flurry of measures announced recently, further reinforced by a new investment law authorising complete foreign ownership of firms in select sectors to be unveiled in Q4, which will likely attract large FDI inflows. Solid tourism growth should also support private consumption while the effects of VAT introduction in January subside,” it said in its latest Consensus Forecast Middle East & North Africa report.

Its panelists expect GDP to increase 2.6 per cent in 2018, and 3.2 per cent in 2019.

A new report from Dubai Chamber of Commerce and Industry (Dubai Chamber) also predicted prosperous years ahead for the UAE economy.

The report predicted that the UAE economy would return to long-term growth in 2018 and beyond, demonstrating that despite the dwindling oil prices witnessed since mid-2014, coupled with weaker global demand for trade, the UAE has successfully strengthened its global budget with relative spending cuts at the government level from 2015 onwards. This has been achieved by revoking subsidies and introducing VAT to diversify the government’s sources of income.


UAE’s trade volumes: increasing

UAE’s trade volumes: increasing

Boost to economy

In fact, the UAE government’s recent announcement of a series of strategic measures in a bid to diversify its economy away from oil and to stimulate investment is already starting to reflect positively in economic data for Q2, FocusEconomics report said.

Following a visa reform, the government announced a comprehensive joint investment plan with Saudi Arabia focused on the agricultural and hydrocarbon sectors as well as industrial SMEs, with further calls for cooperation in education and military ventures. Meanwhile, Abu Dhabi unveiled a three year, $13.6 billion stimulus package aimed at fostering growth in new industries, boost tourism, and facilitate business, while aiming to create 10,000 jobs. This bodes well for business confidence, which shot up to the highest level ever recorded in the May PMI, it added.

Dubai Chambers highlighted that the UAE economy bucked the downward trend affecting global markets in recent years. This was helped by a robust and stable economic environment; a business-friendly atmosphere; a world-class infrastructure and a strategic location that has helped establish the country as an international centre for business, financial and maritime services.

The country had relatively low external-debt-to-GDP ratio with average of 60 per cent over the period 2014-2016, yet it is expected to return to its average of 58 per cent by 2018, which is relatively low by international standards. In addition, both UAE fiscal and the current account balances are improving significantly over the same period and are expected to improve further in 2018 and beyond. This is in part attributed to the UAE maintaining a business-friendly environment; it scores highly in the Ease of Doing Business Index globally and leads the Index for Mena-region countries, the Dubai Chambers report said.


Resilient non-oil sector

Though the UAE’s economy is among the most diversified in the Mena region, it was still not immune to the sharp drop in oil prices over the past couple of years, which weighed on growth and overall economic activity. The UAE’s economy slowed to a seven-year low last year, growing by only 1.5 per cent, primarily due to the low oil price environment, ongoing fiscal consolidation measures, regional economic slowdown and Opec+ oil production cuts, ICAEW report said.

The oil sector contracted by 1.6 per cent last year, mainly because of the Opec+ mandate that saw the UAE cut its oil production by 150,000 barrels per day. Given the extension of the Opec agreement to the end of 2018, oil sector growth is expected to be limited this year, especially given the UAE’s increasing compliance with the production cuts, ICAEW said.

The non-oil sector, on the other hand, proved to be resilient last year despite the unfavourable macroeconomic environment and regional economic slowdown, growing by 3 per cent. The non-oil sector is expected to pick up growth to 3.7 per cent in 2018, supported by improving business sentiments, a buoyant trade and tourism environment and higher public spending, it added.

“The non-oil economy should be largely fueled by strong investment momentum this year,” FocusEconomics said.


Sustained FDI inflows

According to the World Investment Report 2018, foreign direct investment (FDI) inflows to the UAE for 2017 increased to $10.4 billion, registering an annual growth of approximately 7.8 per cent and ranking the Emirates the as the 30th largest global recipient of FDI inflows and the largest recipient in the Mena region and GCC for last year.

The UAE’s performance for 2017 bucked the trend, with the World Investment Report revealing that the combined global FDI inflows decreased by 23 per cent to $1.43 trillion, despite the recovery in world GDP and trade.

Dubai, which traditionally accounts for 25-30 per cent of the UAE’s GDP, is also expected to lift spending by 20 per cent in preparation for Expo 2020.

Michael Armstrong, ICAEW regional director for the Middle East, Africa and South Asia (MEASA), said: “The UAE is on the right track to economic diversification and is implementing the necessary fiscal reforms to support these efforts. The introduction of VAT is an important step toward diversifying government revenue and building tax capacity.

“We’re also encouraged by the recent announcements to reform business ownership laws and residency visa rules. This will definitely help in attracting more foreign direct investment and in creating more stability in the market,” he added.


Rebound in global trade

According to the latest IMF report on the world economy, global GDP growth strengthened to 3.8 per cent in 2017, with a notable rebound in global trade. It was driven by an investment recovery in advanced economies, continued strong growth in emerging Asia and signs of recovery in several commodity exporters on the back of substantial gains in oil prices.

In 2018 and 2019, global GDP is expected to grow to 3.9 per cent supported by strong economic momentum, favourable market sentiment and the expected positive repercussions of an expansionary US fiscal policy.

According to the ICAEW report, the GCC’s economic prospects are promising this year thanks to rising oil prices, higher government spending and steady progress of economic reform.

Overall, the GCC’s GDP is expected to grow 2.3 percent this year, up from 0.1 per cent last year, and as Opec increases oil production, GDP growth is expected to accelerate further for oil exporters this year and in 2019.

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