The UAE's economy continues to fly high

Whether it's Abu Dhabi purchasing a major stake in Volkswagen, Europe's largest carmaker, record aircraft orders from the UAE's airliners or British rock stars buying property on The World, Dubai's latest real estate project, the UAE has attracted plenty of admiring headlines from the international press this quarter. All the more remarkable given recent events elsewhere in the Middle East. In part this reflects the UAE's growing reputation as an international tourism and business hub, and in part it simply reflects the current economic boom. Growth last year hit 8% in real terms. This year is unlikely to be far short. We expect 7%.

Oil prices will again boost growth. We are forecasting an average oil price of USD 35 per barrel in 2004, and USD 30 in 2005. But what is significant about the UAE is that the non oil economy will probably provide most of the impetus this year. Despite having the fourth largest oil reserves in the world, the oil sector accounts for less than a third of the UAE's GDP. Only Bahrain can boast a similarly diversified economy among the GCC states.

Construction and tourism are key non oil drivers. Property related spending remains high. International and regional interest in Dubai's The Palm and The World is strong. Foundation work on the world's tallest tower, Burj Dubai, has already begun, while building is at an advanced stage on Mall of the Emirates, the largest shopping mall outside of the US. Other Emirates, such as Ras al Khaimah, have also announced major real estate schemes. The scope of existing projects does raise the risk of oversupply but it will ensure that growth remains strong in Dubai and the UAE in the near term.

Tourism has also continued to thrive, despite the regional backdrop. Industry figures suggest that Dubai hotels have enjoyed occupancy levels over 90% so far this year. Dubai's Jumeriah Beach hotels have the highest revenue per room in the region. Business confidence is strong. The UAE stock markets reflect the local optimism, with the consolidated index up 40% year to date.

One downside to the boom has been the rise in inflationary pressures. Official figures show consumer prices rising by 3.3% in 2003, but certain sectors, such as construction, have been facing double digit increases in input costs. The rise in costs has led to increasing questions about the sustainability of current growth levels.

Oil remains key. While the direct impact on the economy of oil price movements is relatively limited, oil still provides much of its momentum. Either through government spending, which oil revenues principally finance, or investment flows - companies and individuals from other oil rich countries are large investors in the UAE, particularly into the property sector. But with oil prices at such high levels the boom looks set to continue.

2002 2003 2004 2005
GDP, real % change
1.9, 8.0, 7.0, 3.0,
Inflation, %
2.8, 3.3, 4.0, 3.0,
Current account, % GDP
4.9, 8.5, 12.0, 5.0,
Consolidated budget, % GDP
10.8, 13.7, 16.0, 12.0