Oil prices give economy its best year for half a decade

The UAE posted its highest economic growth in five years last year, but the headline figure doesn't paint a complete picture of the economy.

Manufacturing expanded by 5.9 per cent last year revealing grounds for optimism in an important non-oil segment of the economy. Jumana El Heloueh / Reuters

The UAE posted its best economic growth for five years last year - an impressive feat amid adverse global conditions.

But to focus only on the official GDP expansion rate of 4.2 per cent does not paint a complete picture of the economy. A large part of last year's rise was attributable to greater oil output and higher crude prices.

The Emirates increased production to offset lower output from Libya resulting from civil war in that country. The resulting higher revenues raised the amount of money for the Abu Dhabi Government to invest in areas such as infrastructure and social spending. But higher oil output has an impact on efforts to diversify the economy.

Last year, the contribution of the non-oil sector to the economy fell to 61.6 per cent from 69.1 per cent the year before, official data released yesterday by the Ministry of Economy shows.

For the longer term, officials are targeting a cut in the reliance on crude to guard against the risk of a repeat of 2009, when lower oil prices dragged the economy into a decline. It recovered in 2010 with growth of 1.3 per cent.

"The percentage contribution of oil has gone up, but it will come down again," Sultan Al Mansouri, the Minister of Economy, said yesterday. "Our policy is to diversify and get away from a reliance on oil and ensure its contribution is 20 to 25 per cent [of the economy]."

Limited room for increases in oil production this year is expected to help to tilt the balance back towards non-oil economic segments.

But lower rises in output combined with an uncertain global economy are likely to mean GDP growth moderates this year. Economic growth would drop to about 3 per cent this year, Mr Al Mansouri forecast.

"This year I expect the non-oil sector to bounce back, as spending in Gulf economies usually picks up in the second half of the year, and as the Dubai economy in non-oil picks up," said Shady Shaher, the senior economist for the Middle East and North Africa at Standard Chartered.

Data the ministry released yesterday revealed grounds for optimism in some non-oil segments of the economy.

After falling 11.4 per cent in 2010, manufacturing expanded by 5.9 per cent last year.

The transport, storage and communications sectors, other economic pillars, grew 4 per cent after a 5.5 per cent dip the previous year. Wholesale and retail trade and repair services bounced back from a 10.2 per cent dip in 2010 to expand 8 per cent last year.

But construction was still under strain, the data showed. Growth in the sector fell back to 2.8 per cent from 3.1 per cent in 2010.

A sharp drop in property prices as a result of the financial crisis sapped appetite for new building projects. Property prices have fallen more than 60 per cent in parts of Dubai and to a lesser extent in Abu Dhabi since the middle of 2008.

"The large supply overhang and the completion of additional projects in the coming years render an early and broad-based recovery of the sector unlikely," the IMF said in a report last month.

And to help to further revive the fortunes of businesses, economists say, credit growth needs to pick up.

Sluggishness continues to beset lending, an important driver of GDP before the global financial crisis.

The outlook for lending is expected to continue to be muted this year.