UAE: Growth has been resilient to higher rates

The Federal Reserve will probably keep its benchmark interest rate unchanged when it meets at the end of this month, but recent commentary from officials suggests they may be preparing to cut the Fed Funds rate in the coming months, as inflation is slowing and the labour market is softening. The next meeting after July is in September, and the market is pricing a 25bps cut at that meeting, with at least one more 25bps rate reduction before the end of the year, in line with Emirates NBD’s house view.

The Fed Funds rate has been at 5.5% - the highest level since the turn of the century – for around 10 months now, after the Fed paused its rapid hiking cycle in September 2023. The US economy has proved surprisingly resilient to both the speed and extent of monetary policy tightening since 2022, as inflation has slowed towards the 2% target without the economy being pushed into a recession, something which had been expected by markets and analysts over the last year.

The GCC economies, and in particular the UAE, have also withstood the impact of rising interest rates and continued to post strong non-oil growth last year. Average non-oil GDP growth for the region was around 4.2% in 2023, down from 5.5% in 2022 but still higher than in the years immediately preceding the Covid19 pandemic.

The UAE enjoyed the fastest non-oil growth in the GCC last year, at 6.2%, and while PMI survey data indicate that momentum has slowed a little in the first half of this year, it remains well in expansion territory. This is supported by preliminary GDP data for Abu Dhabi which showed that non-oil growth slowed to 4.7% y/y in Q1 2024 from 10.4% y/y in Q4 2023 and 6.1% y/y in Q1 2023.

Official data shows that private consumption was the key driver of economic growth in the UAE last year, although this was supported by public sector consumption as well as investment. We attribute the almost 12% growth in real private sector consumption at least in part to population growth and new household formation in the UAE. However, Emirates NBD expects private consumption growth to moderate this year as consumers face higher costs of living (particularly housing) as well as higher interest rates on their loans.

Instead, we think investment (both public and private) will play a bigger role in driving non-oil sector growth in 2024 and beyond. Infrastructure investment - both projects in execution and those in planning or budgeting phases - has increased in the first half of 2024. There are approximately AED 315bn worth of private sector projects in execution, as at end-June, up from AED 235bn at the start of the year according to data from MEED Projects. Most of these projects are in the construction sector.

The value of public sector projects in execution has also grown by more than AED 70bn in the first half of the year to stand at AED 334bn at the end of June. The highest value public sector projects in execution currently are in the oil and gas sector however, followed by construction projects. Public sector projects currently in planning stages are focused on transport, power and water.

In Abu Dhabi, large transport projects include the Etihad Rail network project, KIZAD port, and Abu Dhabi metro, while the development of Al Maktoum airport and the metro blue line are key transport sector projects taking place in Dubai. The most significant water sector project is the planned construction of the Dubai strategic sewerage tunnel. There are also several transition or clean energy projects planned for the UAE, including four more reactors under the Barakah One nuclear power plant development, several solar parks, as well as a variety of green or low-carbon hydrogen plants.

Finally, the UAE remains the largest recipient of inward foreign direct investment in the region, with the value of inward FDI rising 35% last year to almost USD 31bn, according to data from UNCTAD, even as the value of global FDI flows declined.

Consequently, Emirates NBD expects non-oil sector growth to slow modestly to 5.0% in 2024, from 6.2% in 2023. Lower interest rates in the final quarter of 2024 and into 2025 should at the margin be supportive of both consumption and investment in the UAE, although the UAE’s strong fiscal position means reliance on debt financing, for public sector projects at least, is low. Given the strategic nature of the planned public sector projects in particular, this investment is likely to take place even if interest rates don’t decline as much or as quickly as markets currently expect, underpinning economic activity in the UAE over the medium term.

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