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Khatija Haque - Head of Research & Chief Economist
Published Date: 19 September 2022
The global economy is slowing. The latest JP Morgan global composite PMI slipped into contraction territory in August for the first time since June 2020. Surging inflation in developed economies is weighing on growth and higher interest rates are contributing to the slowdown. In China, where inflation remains low by global standards, the zaro-Covid policy has been the main drag on activity.
The UAE, and Dubai in particular, is vulnerable to the deteriorating global economic backdrop given its open economy and large services sector. However data so far point to resilience in the local non-oil sector.
The Dubai PMI rose to a new three-year high in August on strong growth in business activity and new work. Both the travel & tourism and the wholesale & retail sectors showed an improvement in business conditions last month and lower fuel prices have led to easing cost pressures on firms.
The number of international visitors to Dubai exceeded 8mn in the year-to-July, a sharp improvement on last year as global travel restrictions have eased, but still around 15% below pre-pandemic levels. The rebound in the tourism sector is also reflected in sharply higher hotel occupancy levels in both Dubai (71.7%) and Abu Dhabi (68.2%) in the first seven months of this year.
We expect the tourism sector in the UAE to perform well through the end of this year as global tourism continues to recover from the pandemic – Australasia’s long haul markets have only recently re-opened – as well as the influx of visitors to the region for the FIFA world cup, which will be held in Qatar in Q4 2022.
Dubai’s real estate sector has also seen strong growth, both in terms of the number of transactions, which were up 60% y/y in the first half of 2022, as well as the value of transactions, which grew more than 85% y/y over the same period. Real estate consultancy Betterhomes reported that there was strong growth in the number of buyers from India, Europe and Russia in H1 2022, and that investors accounted for 68% of all buyers, up 10 percentage points from H1 2021.
While Dubai’s economy appears to be holding up relatively well even as the global economy slows, there is increasing uncertainty around the 2023 outlook. Higher interest rates may slow investment as well as consumption, and the stronger US dollar, to which the dirham is pegged, makes the UAE relatively more expensive for both investors and visitors. Around half of all international visitors to Dubai come from emerging markets, where currencies have weakened significantly against the USD, but even developed markets like the Eurozone and the UK have lost purchasing power in dirham terms.
A positive side-effect of a stronger US dollar is that imports will be less expensive for UAE consumers and businesses, helping to keep inflation in the region relatively contained. Even as oil prices have declined in recent weeks on the back of mounting global recession fears, they remain well above the budget break-evens for GCC oil producers, allowing governments to continue their domestic investment programmes which should underpin growth in the UAE and the rest of the region next year.
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