Dubai economy enters 2-3 year boom phase

Where is the Dubai economy in the economic cycle? Some point to 13 years of fairly rapid growth, with just a small dip in 1998 as a sign that today we must be fairly close to the top. And yet all the economic fundamentals suggest the economy has not even begun to warm up.

In an overheating emerging economy there are tell tale signs. You would expect to see excessive creation of commercial credit. You would expect to see real estate prices triple. You would expect a doubling or trebling of local stock prices. You would expect inflation to be rising.

None of this applies to Dubai right now, though it might in a few years' time. The UAE stock market is beginning to reform and pick up steam but remains undervalued; and real estate prices have moved upwards by around just 10% in the new freehold market.

However, building material costs have increased sharply which is inflation at its root cause. But excessive monetary expansion through credit is not evident, although foreign capital inflows are rising.

Indeed, you only need to look at the sums committed to Dubai projects to realize that a boom is just starting. There is some $30-50 billion committed to projects actually underway or in progress.

There is the $4.5 billion new airport; 60-70 residential towers at the Dubai Marina; the Dubai International Financial Centre which will be bigger than London's Canary Wharf; the tallest building in the world, the Burj Dubai and The Residences next door; the Dubai International City; Dubai Healthcare City; Dubai Festival City; and the $5 billion Dubailand theme park, a desert Disneyland.

Plus two Palm Islands, one with 47 hotels including the largest leisure project in the Middle East; and an offshore archipelago of individual islands shaped like a map of the world. Not to mention an underwater hotel, high-rise freehold offices and plenty of freehold villas in landscaped communities.

Where is the Achilles heel to all this development? In the short term there is none, as the money is committed and from sources that will not dry up overnight.

Longer term this investment has to produce a solid return or investors will not invest anymore, or at least take a break while the market absorbs this munificence.

Pessimists might plump for 2007 as the moment of reckoning; others think 2010 is when this boom will run out of steam.

History suggests that economic booms generally last a bit longer than most people think, and then the downturn catches the majority unaware. Why should it be any different in Dubai?