Dubai:
A gradual pick up in non-oil private sector economic activity in the UAE will be a key driver of economic growth in the country this year and next, but low oil prices and output will continue to be a drag on economic growth, according to the latest UAE Economic Update from Abu Dhabi Commercial Bank (ADCB).
“Our forecast deceleration in headline GDP growth in 2017 masks the gradual pickup in non-oil activity. We estimate that real non-oil GDP growth will strengthen to 3.1 per cent in 2017 and 3.3 per cent in 2018, up from 2.7 per cent in 2016,” said Monica Malik, Chief Economist of ADCB.
The non-oil economic acceleration in 2017 is largely due to a pickup in investment activity in Dubai alongside some external recovery. Expo 2020-related investment activity is driving project awards in Dubai both directly and indirectly. Dubai saw a 14.5 per cent increase in the value of project awards in 2016. These awards should translate into stronger investment implementation in 2017 alongside the strong awards in the first quarter of 2017.
Construction projects have continued to dominate awards, linked to two main areas such as Expo 2020 and real estate and hospitality. Expo 2020 projects include those linked to the site, including the main pavilion and the thematic areas. The Expo committee is looking to progress with the construction stage in 2017 in particular so that international participants can start working on their pavilions in early 2018. Awards linked to the extension of the metro to the Expo site were also contracted last year alongside an upgrade of the Red line.
Dubai-led construction projects are again expected to drive project awards in the second half of 2017. This includes Dubai Creek Mall, which is expected to be tendered in the third quarter of 2017. A number of awards related to the oil and power sector are also expected, including a solar project in Dubai. There have already been signs of a pickup in awards in July and August versus the previous two months, including projects related to Deira Island. The award for the construction of the main section of the UAE Pavilion for Expo 2020 was made in early July, and the RTA has awarded a number of road projects serving the Expo 2020 site.
While the non-oil sector has seen visible improvement, this has not been able to fully offset the impact of low oil prices, implying a sharp decline in real GDP by about by a half from last year.
“We forecast UAE headline real GDP growth to moderate to 1.5 per cent in 2017 from 3 per cent in 2016 on a real contraction in the oil sector after Opec-led production cuts. Oil production averaged 2.91 million bpd in the first seven months of 2017, above the Opec target level of 2.87 million barrels per day (bpd). We continue to forecast a 2.2 per cent contraction in annual average oil output for 2017 given the lower output we expect in the last four months of 2017,” Malik said.
Oil production outlook for 2018 remains modest as the current output deal has already been extended until the first quarter of 2018. Analysts expect the risk of lower production lingering further in 2018 and moderating the GDP growth to about 2.5 per cent.
On the external front, the headwinds seen in 2016 have eased somewhat in 2017 with the weakening in the dollar from its end-2016 level and stronger global growth. Measures to ease visa regulations are also supporting the external recovery, with a strong rise in Chinese and Russian tourist numbers.
Economists say despite the improvements in non-oil private sector-led growth, soft regional demand is dampening the pace of the external recovery. Weak regional external demand and lacklustre consumer spending continue to result in corporates needing to lower prices and thus costs, including labour. This trend is adding to the weak consumer demand backdrop.
