A Middle East report for the first quarter of 2021, from Oxford Economics, predicts the UAE economy will continue to expand steadily over the medium term, but short-term recovery prospects have been hampered by COVID-19 restrictions.
The report, commissioned by ICAEW, observes that the UAE economy has been relatively disappointing since the start of this year, due to the government having to tighten restrictions in response to soaring COVID-19 infections. These restrictions have prompted a downward revision to Oxford Economics’ UAE growth forecast for 2021, but GDP is predicted to grow by 5.5% in 2022, as both oil and non-oil sectors pick up again strongly.
According to the report, the UAE’s non-oil GDP is expected to expand by 3.3% in 2021, down from 4.2% predicted three months ago. Given the ongoing oil GDP slump, total GDP will be flat this year, after an estimated fall of 7.7% in 2020, the biggest fall in three decades.
The report outlines that concerns over resurgent COVID-19 cases are weighing on business optimism. Despite an improvement in employment, it will be difficult for these gains to hold against the backdrop of weakening retail industry and recreation activity levels.
The travel and tourism sector, which accounts for approximately 16% of the overall GDP in the UAE, will have a difficult first half of 2021 due to the new COVID-19 restrictions. The relative normality of day-to-day life in Dubai and the easing of travel restrictions such as an air corridor with the UK, led to a rebound in the tourist sector at the end of 2020 with hotel occupancy rising strongly, but it has since taken a hit.
Although the UAE’s short-term prospects for travel and tourism remain weak, recovery is likely to be strong when it does take hold. This is due to three main factors:
Vaccination: the UAE’s vaccination program has been among the fastest in the world, with over half the population having received at least one dose.
Residents: a marked rise in ‘staycationers’ has helped fill the void left by international travelers. This trend is set to continue as the vaccine roll-out means the willingness to travel in Dubai will continue to climb even if international visitors remain hesitant.
Tourists: the surge in travel to Dubai in the fourth quarter of 2020 illustrated the willingness of people to start traveling again. This also bodes well for the success of Expo 2020, rescheduled to October this year, which will create an opportunity for a faster recovery in Dubai. Improved relations with Qatar and Israel will also boost visitor numbers.
These factors, combined with government policy reforms that will stimulate growth in the rest of the non-oil economy, mean that a robust economic rebound is expected, with non-oil GDP growth forecast to rise above 5% in 2022.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa, and South Asia (MEASA), said: “The first quarter of 2021 has been challenging due to the need to tighten restrictions in response to soaring COVID-19 infections and the oil GDP slump. However, we are encouraged to see the rapid roll-out of COVID-19 vaccines by the UAE government. While the economy continues to be affected by the re-imposed travel bans, a successful vaccination program will be a great step in restoring confidence in the UAE in 2021.”
Data on labor market and population trends in the UAE is sparse but the latest measures will likely delay the return of expats to the country. Recognizing the potential benefits of foreign talent to the economy, the UAE has been implementing reforms to encourage expat participation. The recent ruling on granting citizenship to foreigners and other reforms, such as allowing 100% foreign ownership of onshore companies, new visa regulations, and changes to local laws should lead to an increase in foreign investment.
Scott Livermore, ICAEW Economic Advisor and Chief Economist at Oxford Economics, said: “The UAE already stands out for investment appeal in the region, outpacing its peers when it comes to Foreign Direct Investment inflows, and the new laws will help target sectors to attract and retain foreign investment and talent. However, we believe there is room for improvement. To boost recovery, the UAE government must remain proactive in implementing the necessary fiscal reforms aimed at achieving economic diversification, and continue to support their economies with pro-growth initiatives.”
The federal government included a 5.3% cut in spending in its budget for 2021, but this underplays the likely level of government support to the economy this year. The federal government only accounts for around 15% of public spending in the UAE, and the Abu Dhabi and Dubai governments will be heavily supportive of growth.
The ongoing decline in rents remains a significant drag on headline inflation. While there are tentative signs of bottoming out, the slow return of expat workers means the downward pressure will only unwind gradually.