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NON-OIL TO STAGNATE

Michael Armstrong

UAE likely to see GDP growth of 2.5pc in 2020: report

DUBAI, April 2, 2020

The UAE's non-oil economy will likely see stagnation in the first half of 2020, according to the latest Economic Update from chartered accountancy body ICAEW. 
 
This is due to the ramifications of the escalating Coronavirus pandemic and the slump in oil prices temporarily impacting public spend. However, the total impact on the economy will be offset by the increase in oil production, following the collapse of the Opec+ deal in March. This will result in overall GDP growth of 2.5 per cent for the UAE in 2020, one of the strongest forecasts in recent years.
 
Economic Update: Middle East Q1 2020, produced in partnership by ICAEW and Oxford Economics, reports that the UAE’s non-oil sector is expected to stagnate in 2020 with just 0.1 per cent GDP growth, down from 2.5 per cent forecast previously. 
 
Although the number of coronavirus cases in the UAE is still limited, the pandemic is taking its toll on activity. Momentum already slowed in the second half of 2019 and, in February 2020, the Purchasing Managers’ Index (PMI) fell to its lowest level since Dubai’s 2009 debt crisis. With output levels contracting, further sharp declines are expected. Only 39 per cent of respondents of the latest PMI survey data were hopeful that activity would improve over the next year.
 
The tourism sector, a key pillar of the UAE non-oil economy, is looking particularly vulnerable now that the virus epicentre has shifted to Europe – which is a key market for inbound travel and tourism. The industry contributes over 10 per cent of GDP, directly and through its impact on the supply chain, as well as the spending its employees support. 
 
Travel restrictions in place around the world and reluctance to travel from countries where restrictions aren’t in place have caused tourist arrivals and hotel occupancy to slump significantly. With tourist attractions, restaurants, and shopping malls empty and operating on reduced opening hours, there is reduced scope for domestic visitors to compensate.
 
Most restrictions are scheduled until end-March/early-April but are likely to be extended – which may lead to the economy grinding to a standstill in Q2. According to the Economic Update, any extension of restrictions would trigger further downgrades to the current forecast. However, robust oil sector performance is expected to offset these declines.
 
Like other regional producers, the UAE has had to abide by Opec-mandated oil production cuts, which has held back the contribution to growth from the oil sector. But with the Opec+ deal collapsing, oil output may rise by over 8 per cent this year, the strongest pace since 2011.
 
Although the plunge in oil prices will temporarily affect the UAE public purse, the country’s finances are robust enough to sustain spending during this temporary weakness. The Dubai Government started the year with its largest-ever budget, which underlined its commitment to a successful implementation of Expo 2020. The Abu Dhabi Government is also implementing its stimulus plan, which was announced in H2 2018.
 
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “We applaud the UAE’s proactive approach in fast-tracking the necessary economic relief measures, in line with the International Monetary Fund and World Bank’s recommendations for countries globally during the COVID-19 pandemic. We also commend H.H Sheikh Mohamed bin Zayed Al Nahyan’s message in reassuring the country during these trying times and his support of the G20’s $5 trillion global stimulus plan. We expect that these efforts will help ease the economic pressure on businesses and households so that they can bounce back quicker from this crisis.
 
“The postponement of Expo 2020 Dubai eliminates one of the factors that could drive a strong economic rebound in the second half of this year. However, a delay of up to a year poses a greater opportunity for success – which will result in a more significant overall contribution to the economy. We are hopeful that the global efforts to manage the virus will succeed.”
 
The UAE Central Bank and Federal Government have announced additional measures to support the economy through the crisis. These include support for banks through zero-interest collateralized loans and freeing up banks’ capital buffers. The Dubai and Abu Dhabi Governments have announced measures to help businesses with rents, lower utility bills, and accelerating capital investment measures. These policies are not only aimed at supporting households and businesses throughout the crisis period, but to enable them to benefit in the subsequent upswing.
 
The weakening momentum in the UAE economy is expected to weigh on prices, as inflation remains negative, with the Consumer Price Index (CPI) falling 1.9 per cent year on year in 2019. According to the Economic Update, headline inflation is mostly being dragged down by the weak property market that has resulted in an ongoing decline in rents.
 
While the relevant authorities have taken measures to tackle oversupply, residential sales prices have continued to fall. ICAEW says that market conditions are unlikely to see much of a rebound in the near future, given the job market uncertainty and subdued demand. Price pressures in other sectors are also uncertain – resulting in another year of deflation in the UAE. -- Tradearabia News Service   
 



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