UAE: Near term outlook is brighter

Khatija Haque - Head of Research & Chief Economist
Published Date: 25 October 2021


The UAE economy looks set for faster growth in the final quarter of 2021 after a relatively slow start to the year.  The relaxation of travel restrictions in key tourism markets including the UK and Saudi Arabia should support a strong recovery in the travel and hospitality sectors in the UAE over the coming high season, while Expo 2020 is expected to result in a boost to consumption expenditure in the next two quarters. 

A consumer confidence survey by the Dubai’s Department of Economic Development showed that consumers were more optimistic about their job prospects, their finances and the state of the economy in the third quarter of 2021 than they have been in several years.  Bank lending to individuals has also increased this year following deleveraging in 2019 and 2020, providing further evidence of a recovery in consumer spending in the UAE this year. Emirates NBD expects the non-oil economy to post growth of 3.5% in 2021, accelerating to 4.0% in 2022. 

Developments in the oil market are also likely to boost headline GDP growth in Q4 2021 and through 2022.  The UAE’s oil production grew 3.9% q/q to 2.8mn b/d by end-September and oil production is likely to continue to rise to over 3mn b/d by end-2022 as OPEC+ gradually unwinds its Covid-related production cuts. As a result of this increase in oil production as well as further investment into the UAE’s oil and gas sector, headline GDP growth is likely to accelerate to 4.6% in 2022 from an estimated 1.9% this year. 

As in the rest of the world, inflation in the UAE is accelerating, although it remains relatively low.  CPI grew 0.5% y/y in August - the first positive annual inflation rate since December 2018.  Food and transport have been the main sources of inflation in the UAE in recent months with the latter driven by higher crude oil prices.  However, food prices in the UAE are still lower than they were a year ago. Housing and utility costs – the biggest component of the consumer price index - remain deflationary but the rate of price decline has slowed.  It can take 12-18 months for changes in rents to feed through to the CPI due to the nature of the index. Nevertheless, inflation in the UAE is likely to continue to tick up, averaging 0% in 2021 and accelerating to 1.5% in 2022.

Higher than expected oil prices, while negative for consumers, have provided a boost to the UAE’s budget revenue.  Last year’s budget deficit was wider than the preliminary figures indicated at -2.4% of GDP, but we expect the budget to move into surplus this year even with a modest increase in expenditure, as oil revenues are set to rise by around 30%. 

We expect the UAE to maintain a conservative approach to government finances however, and target spending towards strategic initiatives to boost longer-term growth prospects.  These include developing higher value-added manufacturing, clean energy projects and investment in space missions and technology. Many of the recent policy announcements have focused on enabling and encouraging greater private sector investment in the UAE, with a view to reducing the reliance on government spending as the main engine for growth and economic diversification.

While the near-term outlook for the UAE is certainly brighter, uncertainty remains high and there are several risks on the global horizon. The coronavirus pandemic remains the largest source of uncertainty, with new cases rising at a faster rate in the UK and Europe, the global vaccine rollout remaining highly uneven and the ever-present risk of new potentially vaccine-resistant variants. Global growth is slowing on the back of labour shortages and supply chain disruptions, while central banks are preparing to withdraw the exceptional monetary support they have provided over the last 20 months. The US Federal Reserve is expected to start tapering its asset purchases before the end of this year, and markets are pricing in two rate hikes by the Fed before the end of 2022. While we think this timeline is too aggressive, if the Fed prioritises price stability over maximum employment, tighter monetary policy could put a brake on growth next year.