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Mon 3 Feb 2014 01:51 PM

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UAE economy likely to grow by up to 5% this year

Gov't officials play down warnings that sharp rebound in real estate market may propel inflation

UAE economy likely to grow by up to 5% this year

The UAE's economy is likely to grow at a robust clip of up to 5 percent this year, government officials said on Monday, playing down warnings by private economists that a sharp rebound in the property market may propel inflation.

Activity in the world's No. 3 crude oil exporter picked up over the past year with Dubai rents and house prices soaring by over 20 percent on expectations of a string of mega projects.

"I am conservative so I would put it (2014 growth) between 4.5 percent and 5 percent," UAE Economy Minister Sultan bin Saeed al-Mansouri told reporters.

"It will depend of course on oil prices because we predict oil prices to go down," he said after the first joint outlook presentation by Abu Dhabi, Dubai and the federal government.

That is broadly in line with the International Monetary Fund, which raised last week its 2014 UAE growth prediction to 4.5 percent, the same level as it estimated for 2013, but warned of a potential property bubble.

In oil-powered Abu Dhabi, which accounts for 65 percent of the $390 billion UAE economy, real GDP growth is likely to slow to 6.7 percent this year from 7.4 percent in 2013.

"The acceleration in manufacturing, construction, tourism and trade will be the key engines of Abu Dhabi growth as they will be the main beneficiaries of government investment," said Shorooq al-Zaabi, head of development indicators at the emirate's Department of Economic Development.

She also predicted Abu Dhabi's oil production would rise steadily to 3.1 million bpd in 2017 from 2.7 million in 2013. However, oil prices are likely to fall moderately, to $95 a barrel in 2017 from $109 last year.

Abu Dhabi has earmarked AED330 billion ($90 billion) in investments to fund projects from 2013-17, including a railway, port, museums, petrochemicals and other industries.

In debt-laden Dubai, GDP growth could quicken to over 5 percent in 2015 from 4.7 percent this year as the emirate starts gearing up for hosting the Expo 2020 exhibition.

"The star sectors driving growth will be transportation, trade, tourism and logistics," said Mohamad Lahouel, chief economist at the Dubai Department of Economic Development.

But with solid growth and soaring rents, UAE inflation may shoot above 4 percent this year, levels unseen since a record 12.3 percent in 2008, just before Dubai's property crash.

A surge of inflation could be tricky for the UAE to contain because its dirham currency is pegged to the U.S. dollar, making it hard for the central bank to tighten policy while U.S. interest rates remain very low.

"The main reason is rents. The second reason is capacity. If the output gap has more or less disappeared ... then that inevitably leads to higher inflation," said Marios Maratheftis, regional head of research at Standard Chartered.

"So if there is a surprise for us for the UAE in 2014 it should not be on the growth front, it should be on the inflation side," he told the same event.

Signs of rising price pressures have already showed up in the government data, although analysts have said some of the rent increases appeared not being captured by official figures.

Average inflation in the UAE accelerated to 1.1 percent in 2013, the highest rate since 2009, from 0.7 percent in 2012, which was the lowest level since 1990.

A Reuters poll in January showed a median forecast of 2.5 percent for the UAE inflation in 2014, although some economists predicted it to go as high as 4.5 percent.

"I am not concerned. We have to take steps to make sure... that inflation is controlled," Mansouri said.

"What we are looking at is 2 percent (inflation in 2014) ... that is reasonable. If it starts jumping more than that we will start getting worried," he added.