Worst may be over for the UAE economy

Rising crude prices and public spending are boosting confidence, says a new report by Morgan Stanley.

The economy is predicted to see a mild recovery next year and may already have reached the bottom of the downturn, according to a report from Morgan Stanley that helped UAE stock markets close higher yesterday. "The worst may indeed be behind us," said Mohammed Jaber, a Dubai-based analyst at Morgan Stanley. "The strength of the recovery will depend on the momentum for global growth and the timely resolution of imbalances in its domestic property and credit markets."

The rising price of oil and local stimulus measures have boosted economic sentiment across the Emirates, despite a consensus among economists that output will shrink this year. Morgan Stanley expects the economy to contract by 2 per cent for the year as the property industry continues to face difficulties and oil production declines. The forecast is at the lower end of those published by local and international banks so far this year. According to the average of eight forecasts collated by the The National, the UAE economy will shrink by about 0.8 per cent this year.

The IMF predicted last month that growth in the Middle East this year would halve, and the UAE economy would contract 0.6 per cent. That is still better than an expected 1.3 per cent contraction in the global economy. Morgan Stanley said expected weakness in financial services, manufacturing and real estate would negatively impact the non-oil sector, which was likely to remain flat this year. "The main drag on non-oil growth stems from the construction and real estate sectors - which comprise 24 per cent of non-oil GDP - which we project will contract by about 5 per cent in real terms," Mr Jaber said.

"Moreover, the impact of lower oil prices, underperforming capital markets and a weak real estate sector on consumer spending may be significant." The slowdown in credit growth among local banks was also identified as a brake on economic expansion. That growth could be further dampened because banks need to improve their loan-to-deposit ratios. Morgan Stanley expects the oil sector to contract by 6 per cent this year in response to the sharp drop in global demand. Despite higher oil prices recently, they remain about 30 per cent lower than their average last year, and well below their peak of US$147 a barrel last July.

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