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Khatija Haque - Head of Research & Chief Economist
Published Date: 10 January 2022
The UAE has enjoyed a strong finish to 2021, with Expo 2020 and rebounding tourism boosting domestic demand. While the tourism sector is likely to take some time to fully recovery from the Covid pandemic, the latest data from the Department of Economics and Tourism shows that international visitor numbers to Dubai in November had recovered to almost 76% of 2019 levels and the December data to is likely to show further improvement. Hotel occupancy and revenue per available room have also recovered significantly from 2020 despite the challenges posed by first the Delta and then the Omicron variants of the coronavirus in 2021.
Source: Department of Economy and Tourism, Emirates NBD Research
The recent survey data for the UAE supports this view: even with a slight decline in the December Purchasing Managers’ Index (PMI) reading, the average PMI for Q4 2021 was the highest since Q2 2019. This indicates that the UAE economy likely saw faster GDP growth in the final quarter of last year. Emirates NBD estimates non-oil GDP grew 3.5% in 2021 after a sharp Covid-related contraction in 2020. While the near-term outlook is clouded by the surge in coronavirus cases, the UAE’s high vaccination rate and relatively young population stand it in good stead to be able to withstand the current wave of infections without needing to reimpose the strict measures implemented in Q2 2020. While growth may slow somewhat in early 2022, we think the non-oil sectors will expand by 4.0% this year.
Oil prices recovered sharply in 2021, rising more than 60% on average compared with 2020, boosting sentiment and allowing GCC governments to narrow their 2020 budget deficits significantly. The UAE probably recorded a budget surplus in 2021, and with oil prices likely to average around USD 70/b again in 2022, there is fiscal space for increased public sector investment in strategic growth sectors. With OPEC+ expected to continue increasing oil production in the coming months, the hydrocarbon sector should contribute positively to the UAE’s GDP growth in 2022 for the first time in three years. Emirate NBD expects headline GDP growth to accelerate to 4.6% this year from an estimated 1.9% in 2021.
While the outlook for 2022 remains broadly constructive, there is still a high degree of uncertainty especially with regards to the evolution of the coronavirus pandemic. The recently identified Omicron variant appears to be much more easily transmitted and has led to a surge in Covid-19 cases globally that far exceeds previous peaks. This has led to renewed travel restrictions and lockdowns in some countries, mainly in Europe and parts of Asia, which will likely weigh on economic growth in the near term.
Another potential risk to the outlook for 2022 relates to the withdrawal of the exceptional stimulus injected into the global economy in 2020, which could likely to lead to heightened volatility in financial markets – we’ve already had a taste of that in the first trading week of 2022 - and provide a further headwind to growth. Several central banks, including the Bank of England, have already started to raise interest rates to curb inflation and the US Federal Reserve in December signalled a more hawkish view on rates than in prior meetings, citing the improvement in the US labour market in recent months. The market is now pricing in three rate increases from the Fed this year, in line with the Fed’s own projections, which would raise borrowing costs for businesses and consumers in the UAE as well as those in the US.
Higher interest rates and a stronger US dollar could prove headwinds to growth in the UAE in 2022, but the structural reforms implemented over the last couple of years will help to boost investment and drive growth over the medium term. These reforms include the expansion of longer-term residency visas to broader categories of residents and new pathways to citizenship, wide-ranging changes to personal and labour laws, allowing 100% foreign ownership of onshore companies and most recently, the decision to align the UAE’s working week with that of larger developed economies. These measures will serve to reduce barriers to investment and attract both human and financial capital to the UAE over the coming years.
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