By Tim Fox
Predictions For 2020: While the UAE's fiscal position and balance sheet is one of the strongest in the region, the global macro environment faces several challenges this year
2019 was a challenging year for the UAE, with the risks to our growth forecast of 2 percent being on the downside. While oil production increased nearly 3 percent this year, providing a boost to real GDP, growth in the non-oil sectors has been more subdued. Preliminary figures for the first quarter show the non-oil economy expanded just 0.3 percent year-on-year, only fractionally better than the Q4 2018 growth rate and the softest first quarter GDP growth since at least 2013.
Official data for Dubai is more encouraging, with real growth accelerating to 2.1 percent in the first half of 2019, compared with 1.8 percent in H1 2018. In 2018, construction and real estate were the main engines of Dubai’s growth, as the emirate prepared to host Expo 2020. Growth in these key sectors slowed in the first half of 2019, which was to be expected as projects related to the expo neared completion.
However, the increase in supply of residential and commercial property ahead of Expo 2020 has coincided with a softening in domestic demand, leading to lower real estate prices. There are several factors that have weighed on domestic demand in the UAE, including a soft job market, stagnant or declining wages and salaries across most sectors and the introduction of VAT and other consumption taxes. Firms have responded by reducing selling prices in the competitive environment, but this has contributed to compressed profit margins and encouraged further cost-cutting measures by businesses, which in turn has weighed on job creation.
The global macro environment as we enter 2020 remains uncertain on several fronts, including on global trade, Brexit and US domestic politics. In the GCC too, geopolitical tensions remain elevated while the outlook for oil prices allows little room for further fiscal stimulus.
The recent OPEC+ oil agreement implies more production cuts at least in the first quarter of the year, with these likely to be extended through H1 2020, and with the UAE unlikely to escape their impact.
Lower interest rates should also provide some support for economic activity, reducing borrowing costs both for consumers and businesses. However, the US dollar remains relatively strong on a trade weighted basis, despite 75bp in rate cuts by the Fed this year, and this has continued to be a headwind for Dubai in particular, as the strong US dollar over the last couple of years has eroded competiveness. Indeed, the lack of growth in visitor numbers to Dubai in 2018 can largely be attributed to the surge in the US dollar relative to emerging market currencies, as most visitors to Dubai are drawn from emerging markets.
"The anticipated boost to tourism from the expo should have a positive knock-on impact on wholesale and retail trade as well as transport and related services"
We have already seen an increase in international visitor numbers to Dubai in 2019, and this is likely to rise further in 2020 with Expo 2020 Dubai. The anticipated boost to tourism from the expo should have a positive knock-on impact on wholesale and retail trade as well as transport and related services.
The UAE’s fiscal position and balance sheet is one of the strongest in the region, giving the authorities some scope to provide additional fiscal stimulus to support growth in the non-oil sectors of the economy, even with an expected decline in the oil price next year. Overall, we expect the UAE economy to grow 2.4 percent in 2020, which reflects a moderate improvement from 2019 in the context of a challenging global growth backdrop.