The economic recovery strengthened in 2011 thanks to rising oil production, resurgent exports, rebounding tourism, and increased government spending, and momentum should hold firm in 2012 before slowing next year.
IHS Global Insight Perspective | |
Significance | National accounts data recently published by the National Bureau of Statistics showed that UAE GDP grew 4.2% in real terms in 2011, following modest growth of 1.4% in 2010. |
Implications | Strong growth in exports and investment were complimented by rebounding consumption. The oil and gas sector also benefited from ramped-up production. |
Outlook | Economic growth in the United Arab Emirates will ease in 2012, but hold firm at 4.1%. We see a sharper slowdown in 2013 as the oil sector becomes a drag on the economy, with GDP growth sliding back to 1.8%. |
National account data for 2011 recently published by the National Bureau of Statistics (NBS) showed the UAE economy recovered more strongly last year, with real GDP growth accelerating to 4.2% from just 1.4% in 2010. The contraction in 2009 was also deepened, from 1.6% to 4.8%, according to the data. In nominal terms, the economy surpassed its pre-crisis size of 1,155 billion dirhams (USD314.5 billion) in 2008 to reach AED1,244 billion (USD338.7 billion) in 2011, thanks to a sharp 19.3% expansion from the previous year. The NBS did not release GDP breakdowns at the emirate-level, however.
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The UAE's economic recovery strengthened in 2011 thanks to rising oil production, resurgent exports, rebounding tourism, and increased government spending, despite the regional turmoil. Indeed, the UAE largely escaped the social unrest that swept through the region last year. Exports and investment were again key growth drivers, rounded out by rebounding consumption. Fixed capital investment continued to expand at a strong annual rate of 11.6%, while exports of goods and services surged 14.1% in 2011. After contracting the two previous years, private and government consumption contributed positively to overall GDP in 2011, rising by 4.3% and 3.0% respectively. With the support of oil-rich Abu Dhabi, the federal government revived public spending and investment in 2011 to help ease social tensions arising from the turbulence and unrest from the so-called Arab Spring. The government rolled out a USD1.6-billion development plan for the four smaller northern emirates—Ajman, Fujairah, Ras al-Khaimah, and Umm al-Quwain—with a focus on infrastructure, water, and electricity. Moreover, subsidies and other social-support measures were implemented in the wake of the crisis, reinvigorating household consumption which previously had contracted by 5.2% in 2010 and 19.5% in 2009. The rebound in domestic demand spurred an 18.7% jump in imports of goods and services in 2011.
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Boost from Oil Sector
The UAE and other OPEC producers boosted oil output in 2011 given the shut-in Libyan production. UAE crude oil production climbed 8.4%, to an average annual rate of 2.5 million barrels per day in 2011, according to the International Energy Agency (IEA). Subsequently, the NBS reported that production gains helped fuel robust growth of 6.7% in the oil and gas sector, compared to a revised growth figure of 1.0% in 2010. Previously the data showed a 5.6% contraction in the oil and gas sector in 2010, but the new historical data mesh well with the 1.8% rise in crude output reported by the IEA.
With the additional stimulus measures helping to bolster domestic demand and the UAE largely sidestepping the turmoil from the so-called Arab Spring, the tourism, construction, and transportation and communication sectors witnessed stronger recoveries. Regarding tourism, the hospitality sector grew 8.0% in 2011, ending two years of declines. The transportation and communication sector expanded 4.0%, after contracting 3.3% in 2010. The construction sector continued its recovery as well, with growth rising to 3.2% in 2011 compared to 2.4% the previous year. According to the NBS, manufacturing and wholesale and retail trade were up 3.0% and 2.8% respectively. Moreover, the stimulus and social-support measures fueled 6.4% growth in social services and 3.0% growth in government services. Overall, non-oil GDP rose 3.1% in 2011, accelerating from its meager 1.4% advance in 2010.
Outlook and Implications
Although the UAE economy has shrugged off the regional turmoil, it faces stiffer headwinds ahead. IHS Global Insight sees public spending and investment continuing apace in 2012, thanks to elevated oil prices and continued social support measures including wage hikes and subsidies, which will underpin the economy’s growth momentum and help counterbalance weakening external demand. UAE exports of goods and services will see more moderate growth from softer demand abroad and reduced oil-output gains, but should nonetheless expand 7.5% in real terms in 2012. Private consumption has been slow to recover, but should continue to gradually strengthen as credit and financial conditions improve and domestic activity holds strong. At the sector level, the oil sector will not provide the same lift to the economy as in 2011, with oil GDP easing to 3.9% in 2012. Non-oil growth is expected to strengthen to 4.2%, as manufacturing, construction, trade, and tourism post healthy performances in 2012.
We see GDP growth slowing sharply in 2013, to 1.8%, as the oil sector becomes a drag on growth in light of reduced output and lower prices, now projected at USD93/barrel next year. Oil GDP is projected to contract 2.6% next year, with overall GDP buoyed by a 3.7% increase in non-oil economic activity. Risks to the economic outlook remain in light of ongoing worries about the Eurozone debt crisis and the global economy, not to mention heightened geopolitical tensions in the Middle East. A worsening in global economic and financial conditions would feed back to the UAE through reduced trade, tourism, and investment, as well as higher financing costs.