Analysts have this year enjoyed a small luxury long denied to them: being able to forecast, if only tentatively, a broad uptick in the world economy for the first time in almost a decade.
The International Monetary Fund (IMF)’s chief economist, Maurice Obstfeldt, wrote in the IMF’s latest World Economic Outlook that “we could be at a turning point”. The report forecasts global growth in 2017 of 3.5 percent, up from 3.1 percent forecast in 2016.
Increased activity in cyclical sectors such as manufacturing, as businesses respond to expectations of stronger global demand and reduced deflationary pressures, has prompted a more optimistic outlook, with impacts on established and emerging economies.
The GCC overall is unlikely to benefit from this rebound as much as other parts of the world because of structural issues, including its comparative dependence on oil, warns a report from Oxford Economics and the Institute of Chartered Accountants in England and Wales (ICAEW). However, the one exception to this statement is the UAE, it says.
“World trade is growing at a faster rate [around 10 percent] than at any other time since the rebound from the global financial crisis in 2009. But this gain is likely to be felt unevenly across the Middle East,” the report states.
“However, as a relatively diversified economy — with hydrocarbons accounting for just 22 percent of total exports in 2015 — and a key global trading hub, the UAE is benefitting more from the rebound in world trade flows than other GCC economies. Prospects for investment look increasingly positive.”
The report forecasts steady 1.7 percent overall GDP growth for the UAE this year. This is just over half as fast as 2016 due to OPEC production cuts but constitutes a greater contribution from the non-oil sector, from 2.3 percent in 2016 to 2.8 percent in 2017. The UAE’s GDP growth is forecast to accelerate further, to 3.3 percent in 2018.
The conclusions of the ICAEW/Oxford Economics study — the research partnership’s latest quarterly Middle East Economic Insight — will serve to strengthen the UAE’s position as a global business hub and further motivate other Gulf states to diversify their economies.
While noting that there are few robust world GDP estimates due to the necessity of analysts agreeing currency rates for the purpose, the study forecasts 3 percent global economic growth in 2018 — the fastest rate since the 2009 rebound. This is up from 2.8 percent in 2017 and 2.3 percent in 2016.
In an interview with Arabian Business, report co-author Tom Rogers, associate director EMEA (Europe, Middle East and Africa), of macro consulting at Oxford Economics, says: “The world economy is in pretty good shape. Businesses are becoming more confident and the difficulties of the past few years are starting to ease.
“If you look at some of the indicators on container shipping and air freight, it actually looks like world trade has been growing faster in the first half of 2017 than at any other time since the global financial crisis.”
Rogers explains why many GCC countries are unlikely to benefit from the broad-based pick-up in the global economy. “Firstly, many regional economies remain heavily reliant on commodity exports and have low non-oil exports, so any improvement in non-oil exports performance makes limited difference to GDP and jobs,” he says.
“What’s more, the rebound is not going to have much impact in rebalancing the oil market because there’s still quite a lot of spare capacity in the US, so if oil prices go up, so does US production.
“[Saudi energy minister Khalid Al Falih said there would be no discussion of deeper oil output cuts at an OPEC meeting last month], but, if there is, the reality is that when OPEC cuts, the US increases production, providing the Gulf with limited upside in terms of higher oil prices.
“The other reason is that too few GCC economies are diversified enough to cope with or actually benefit from this increase in world trade. They are not creating the manufactured goods and they are not tourism destinations that stand to benefit from an uptick in US and Chinese tourists.”
The one exception is the UAE, according to the report. “Although several economies in the region aspire to become key east-west trading hubs and service global trade both logistically and through service industries, only the UAE currently qualifies as such.
“With the world’s third busiest airport (Dubai International Airport) and ninth-busiest container port (Jebel Ali), the UAE is likely to be a key beneficiary of the rebound in global trade and growth in global tourism.”
The country’s economy is also diversified into professional services, financial services, the burgeoning technology sector and others, giving it key advantages over Saudi Arabia, Kuwait and others in the region.
Says Rogers: “The key sectors driving the UAE’s growth and enabling it to capitalise on the green shoots of global recovery are trade and tourism.
“Jebel Ali is a hugely important container port, so when goods go from China to Europe or China to the US, or from Turkey to Japan, and so on, there is a lot of activity within the UAE and it can service that trade in a way no other country in this region can.
“In terms of tourism, a strong dollar is generally good for world tourism; we are seeing that at the moment so US consumers are seeing a boost to their incomes. Even if the US dollar is pegged to the dirham, they still see a boost in their income and that’s good for tourism.”
In June, Dubai Tourism reported a record 11 percent year-on-year increase in overnight visitors in the first three months of 2017. Some 14.9 million overnight visitors came to Dubai during 2016, up 5 percent on the previous year, with the biggest source markets being India, Saudi Arabia and the UK.
The ICAEW/Oxford Economics report notes that its forecast 3.2 percent growth in the UAE’s non-oil sector for 2017 is related to that acceleration of the world economy, through greater activity of the port, service sectors surrounding that, the pick-up in global investment and subsequent boost to the financial services sector, and tourism.
It is little surprise, then, that the outlook among businesses and consumers has improved in recent months. Emirates NBD’s Purchasing Manager’s Index hit a 19-month high in March, while the bank’s Dubai Economy Tracker Index — which measures overall business conditions in the emirate’s non-oil private sector — also rose, to 56.5 from 55.0 in May.
The positive conclusions for the UAE are echoed in the Dubai Government’s own economic outlook for the years ahead. The latest official figures show forecast real economic growth to hit 3.1 percent by the end of 2017 and 3.6 percent in 2018.
Sheikh Ahmed Bin Saeed Al Maktoum, second deputy chairman of the Executive Council and chairman of the Economic Development Committee, said in a statement to media in July that Dubai’s economy is expected to expand further, “having outperformed global economic growth and defied downward trends in 2016”.
The growth is being driven by large-scale investments as well as growth in the tourism, real estate and manufacturing sectors. According to Sheikh Ahmed, the real estate sector is projected to grow by 4.3 percent and 3.8 percent respectively in 2017 and 2018, while the manufacturing sector is anticipated to grow by 3.3 percent and 4.1 percent this year and next, underpinned by the Dubai Industrial Strategy.
Nearly 47 contracts worth over AED11bn ($2.99bn) are set to be awarded in 2017 for projects at the Dubai Expo 2020 site alone, Sheikh Ahmed added. Meanwhile, the local tourism sector grew by 11 percent in 2016 and is expected to record further growth in the coming years, at a projected 5 percent and 5.1 percent in 2017 and 2018.
Rogers says: “While our own report tells a fairly negative story for the GCC in one sense, in that things are happening in the world economy but the region is not going to benefit as much as it could, the UAE story is undeniably positive – it has a headstart over others.
“The findings also demonstrate that now is a good time for [other Middle East] countries to be following the UAE’s example and pursuing a diversification agenda. Any gains made now will be all the more impressive because the world economy is growing faster.”
Another reason why GCC governments should invest in diversification at this point in time is that interest rates remain low by historical standards. Rogers says he expects sovereign borrowing to continue as governments seek to plug budget deficits.
“Interest rates will probably edge up once more this year and a couple of times next year and those increases will have to be matched within the UAE, Saudi and others due to the currency pegs
“Nevertheless, finance will remain pretty cheap for a while. So if governments are serious about diversification, now is the time to finance that by borrowing and investing.”
If the UAE continues to diversify its economy and capitalise on its strategic east-west trading position, it stands to reap significant gains from an improved global economy in the years ahead.
Abu Dhabi GDP growth to rise in 2018 despite oil cuts
While oil production cuts could weigh down Abu Dhabi’s real GDP for the rest of the year, the non-oil sector will tell a more positive story with growth strengthening in 2018, according to a separate analysis.
The UAE has curbed its oil production as part of the latest OPEC agreement at the end of 2016, extended in May for a further nine months. Because of this, production is expected to fall by 0.1 percent in 2017, compared to a 2.2 percent expansion in 2016, said a report by BMI Research, part of Fitch Group, last week.
However, an easing of the curb in 2018 will see production return to growth at 2.1 percent in 2018, providing a boost to the economy. Abu Dhabi’s GDP growth is forecast to pick up to 2.9 percent in 2018, while Dubai’s more diversified economy will expand by 3.2 percent, said BMI.
The analysis backs up the increasing optimism displayed by the majority of chief executives in the UAE in a survey last month. Some 82 percent of UAE-based CEOs said they had ‘positive’ or ‘very positive’ expectations of local business conditions for the coming year, according to Oxford Business Group (OBG)’s inaugural Business Barometer survey.
It also found that three-quarters of CEOs interviewed by OBG said their company was ‘likely’ or ‘very likely’ to make a significant capital investment in the coming 12 months.
OBG asked high-level executives from across industry sectors a broad-ranging series of questions aimed at gauging business sentiment. It said the survey concluded that “the UAE’s many strengths continue to weigh favourably against the impact of external headwinds on the country’s economy”.
OBG editor-in-chief and managing editor for the Middle East, Oliver Cornock, said: “The major reforms to the UAE’s subsidy system and the imminent introduction of a GCC-wide value-added tax come at a time when the private sector is already feeling the pinch, and yet most of the CEOs we spoke to remain positive or very positive about local business conditions,” he said.
“I think we can draw two important conclusions from this; first, it speaks of the underlying, long-term confidence CEOs have in the UAE; and, perhaps more importantly, it underlines the identified, but as-yet-unrealised potential that the country offers.”
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