Tuesday, August 18, 2015

This economy will slow down this year but employment will not

The UAE economy is set for a “soft landing” this year, as growth slows to its lowest rate in six years, say analysts from Bank of America Merrill Lynch.

“Soft landing” is an industry term for a slowdown in economic growth that does not worsen inflation and unemployment.

“Economic activity [in the UAE] has started to show signs of weakness,” wrote Jean-Michel Saliba, an economist at the bank, in a research note.

“It is likely to face headwinds … due to a confluence of low oil prices, a less favourable external backdrop, and gradually tightening domestic liquidity.”

The IMF forecasts UAE economic growth of 3 per cent this year, down from 4.6 per cent last year, as the oil slump results in weaker real estate and corporate activity.

Government spending cuts and tax increases would also drag down economic growth, it said. Standard Chartered projects the UAE’s GDP growth at between 3.5 and 4 per cent this year, but Standard and Poor’s expects growth of just 2 per cent.
Economists agree that this year’s GDP growth rate will be less than last year’s.

“The UAE economy is slowing down for sure,” said Philippe Dauba-Pantanacce, a senior economist for the Middle East at Standard Chartered.
“But this is still a very good pace of growth. It is always better to grow steadily and at a more reasonable pace than to go through cycles of boom and bust. “The UAE is by far the most diversified economy in the region. And Dubai is the best form of diversification away from oil that the UAE could ever have dreamed of.”

But low oil prices have had an adverse effect even on Dubai, as they weighed on property sales, consumer spending, banking liquidity, and consumer and corporate sentiment.

Trevor Cullinan, an analyst at Standard and Poor’s, said rising oil output and government investment spending should bolster economic growth in the UAE this year. “However, the more than halving in the oil price since mid-2014 will dampen private sector domestic demand and the overall net export position,” he said.

The UAE’s pace of economic growth is expected to decline 1 per cent each year up to 2020 because of planned government spending cuts.

The net debt position of Dubai’s government-related entities could also prove “challenging” next year, said Mr Saliba, as about US$7 billion of debt payments by GREs will come due next year. -End-

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