UAE's digital sector to grow faster than rest of the economy

Economist study commissioned by Google says digital transactions and activity will drive overall growth

A screengrab of the website Noon.com that will compete with Souq.com and tap into a growing appetite for online shopping.

The digital parts of the UAE’s economy are likely to grow at a faster rate than the rest in the coming years because of high demand for e-commerce and room for retailers to sell more online, according to a study by the Economist Intelligence Unit (EIU) commissioned by Google.

“We see digital as a new source of growth for the UAE economy,” Conor Griffin, lead author of the study, said at Abu Dhabi’s Department of Economic Development on Wednesday. “We see the economy at present growing at around 3 per cent, 3.5 per cent on average over the next five years.

“We expect growth globally in the online economy to outpace growth in the offline economy. While we might expect overall GDP growth of around 2.5 per cent a year, the digital economy will grow faster than that and the offline economy will grow slower,” he said.

That is especially the case in the UAE where e-commerce has so far not been as quick to take off as elsewhere, largely because malls are omnipresent and residents often go to them not just to shop but to socialise. Mr Griffin said that only 4 per cent of retail sales in the UAE are made online compared with 15 per cent in the UK, for example. Overall, while difficult to accurately gauge, the digital economy represents about 4 per cent of GDP in the UAE compared with 8 per cent of GDP in the US, Mr Griffin said.

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There are signs, however, that things are rapidly changing and the gap between the developed world and the UAE is shrinking. Digital payments for goods and services have been on the rise over the past year in this country, which boasts one of the highest penetration of smartphones in the world. Online transactions in the Middle East rose by 22 per cent in 2016, on the back of a surge in payments for events and entertainment, according to a region-wide survey conducted by the Amazon-owned company, Payfort.

Much of that growth came from the UAE where, increasingly, consumers are shunning bricks and mortar retail goods and service vendors, including banks, for online alternatives. That has led to flourishing of online retail services, especially in the wake of Amazon's purchase of the online retailer Souq.com earlier this year for US$650 million.

The EIU study found that 40 per cent of the smartphone users here make in-app purchases compared with the world average of 10 per cent, illustrating the scope for growth.

The Middle East’s e-commerce sector is growing faster than anywhere else in the world, with online sales expected to double to $48.8 billion by 2021, according to BMI Research.

“Retail is perhaps the most clear-cut example of how a sector can be transformed by a digital technology, most importantly perhaps by e-commerce,” Mr Griffin said. “E-commerce has been around for 10 to 15 years but what is new how it’s involving in a new way.

"What we’re seeing in the UAE and Souq.com is a good example, a shift from people purchasing on their computers to purchasing via mobile devices.”

When it comes to banking, a key pillar of the UAE economy, the study found one third of residents use mobile apps but that they use them for checking balances or simple transfers. Complicated banking transactions and commercial banking transactions, the study found, are still largely carried out offline.

Mr Griffin noted that the main challenges to growth in the digital economy in the UAE include the fact that there is a lack of skilled IT workers needed to help companies go digital and that companies are not spending enough on technology.