The US 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 Fed meeting is in September, and the market is pricing a 25-basis point 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 per cent – 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 per cent 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 gross domestic product growth for the region was around 4.2 per cent in 2023, down from 5.5 per cent in 2022 but still higher than in the years immediately preceding the Covid-19 pandemic.
The UAE enjoyed the fastest non-oil growth in the region last year, at 6.2 per cent, and while purchasing managers' index 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 per cent year on year in Q1 2024 from 10.4 per cent year on year in Q4 2023 and 6.1 per cent year on year 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 per cent 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 Dh315 billion ($86 billion) worth of private sector projects in execution, as at end-June, up from Dh235 billion 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 Dh70 billion in the first half of the year to stand at Dh334 billion 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 International 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 per cent last year to nearly $31 billion, 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 per cent this year, from 6.2 per cent last year.
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.
