Higher non-oil GDP prompts UAE Central Bank to increase 2018 growth forecast

The country's economy is now projected to expand by 2.7% versus earlier estimate of 2.5%

Sustained low demand has cushioned oil from geopoltical tensions in the Middle East. EPA

The Central Bank of the UAE raised its economic growth forecast for 2018 to 2.7 per cent from its previous projection of 2.5 per cent thanks to an expected expansion in the non-oil sector despite slower year-on-year growth in the first quarter.

There is an improvement in the growth projections of non-oil gross domestic product (GDP), "due to improved international economic conditions,” the central bank said in a first quarter economic report published Tuesday on its website. “In parallel, the projected oil output is lower for 2018, based on the first three months’ realisation in the current year, which has impacted negatively oil GDP, and hence overall GDP growth in 2018.”

Non-oil GDP growth is forecast to rise to 3.9 per cent this year compared with 3.4 per cent last year.

Growth in the first quarter reached 1.21 per cent in the first quarter, slower than 3.01 per cent recorded in a year-earlier period, but higher than 0.06 per cent expansion in the fourth quarter. GDP growth, which reached 1.5 per cent in 2017 from 2.7 per cent a year earlier, was affected by slower non-oil expansion due to the UAE’s compliance as an Opec member with global oil output curbs that started in January last year and were extended till the end of 2018.

Non-oil GDP in the first quarter was driven by higher global growth, improvement in private credit growth and the depreciation of the dirham amid a weak dollar to which the currency is pegged, which boosted the country’s competitiveness.

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“The non-hydrocarbon sector in the UAE grew by 3.1 per cent in the first quarter of 2018, driven mainly by continued improvement in global economic conditions and the positive economic sentiment triggered by higher oil prices, increasing fiscal space for priority spending in the near future,” the report said.

The United States is growing faster than other developed markets, particularly Japan and the eurozone and the dollar has surged more than 5 per cent since mid-April, its biggest rally since late 2015. The dollar rally has coincided also with a surge in oil prices, which touched $80 a barrel earlier this month.

For 2019, the central bank is projecting the economy to accelerate 3.1 per cent, driven by non-oil GDP expansion of 4.3 per cent and oil GDP expansion of 0.1 per cent. This compares with oil GDP contraction of 0.3 per cent in 2018 versus 3.9 per cent growth in non-oil GDP.

Higher oil prices and non-oil growth fuelled by increased government spending are expected to help boost UAE growth to 2 per cent in 2018 and 3.6 per cent 2019, according to International Monetary Fund estimates.

The central bank’s estimates are in line with projections from Oxford Economics.

“We expect the UAE economy to grow by 2.6 per cent this year, driven by higher government spending at the federal and emirate levels, rising oil prices, a buoyant trade and tourism environment and a pick-up in investment ahead of Expo 2020 in Dubai,” said Mohamed Bardastani, senior Middle East economist at Oxford Economics.

“Our projection for 2019 is similarly positive, as we expect growth to accelerate to 3.2 per cent, assuming the normalisation of oil production level by the UAE.”

As for inflation, the central bank is projecting consumer prices to moderate to 3.5 per cent this year and 2.5 per cent next year. Inflation increased to 4.2 per cent in the first quarter compared with 1.8 per cent in the fourth quarter due to the introduction of 5 per cent VAT and higher fuel prices.

Separately, the UAE’s current account surplus increased to Dh97.1 billion in 2017 or 6.9 per cent of GDP, compared with Dh48.5bn or 3.7 per cent of GDP in 2016, the central bank said in a report released on Monday.

“The increase of surplus in 2017 is attributed to the increase in the trade balance associated mainly with the oil price evolution and improvement in economic activity,” the report said. “The increase in the trade balance surplus was accompanied with increase in the surplus of the investment income and was complemented with narrower deficit in the services balance despite the wider deficit of transfers.”