UAE's non-oil sector drives economic growth in 2018
Dubai, UAE, November 28, 2018: According to ICAEW’s latest Economic Insight report, the economic outlook for UAE is set to accelerate to 2% this year, up from the eight-year low of 0.8% in 2017, supported by rising oil prices, regional economic recovery, higher public spending and investment and a gradual build-up in business momentum. The accountancy and finance body says the non-oil sector, which represents close to 70% of the UAE’s economy, is driving the country’s economic growth this year.
Economic Insight: Middle East Q4 2018, produced by Oxford Economics, says the oil sector is expected to remain a drag on growth in 2018, as overall production has remained limited in the first half of 2018 at an average of 2.85 million barrels per day, down by almost 2% from the average of 2.91 million barrels per day in H1 2017. However, oil production increased in Q3 2018 by nearly 0.14 million barrels per day to 2.99 million barrels per day, higher than the 2.85 million barrels per day seen in the first half of 2018, due to tighter global oil market conditions as countries brace for the effects of US sanctions against Iran.
Oil production is expected to pick up further by the year end, subject to market conditions, as the UAE continues to expand its production capacity to 3.5 million barrels per day by the end of this year. Overall, despite the recent acceleration in oil activity, the oil-sector is expected to decline slightly by 0.3% in 2018.
In contrast, the non-oil sector confirms that the economy has been recovering from last year’s slowdown. Non-oil activity, as evident by the Central Bank's non-oil augmented economic composite indicator, has accelerated by 3.8% year-on-year in Q1 2018, marking the fastest expansion in eight quarters, before decelerating marginally to 3.6% in Q2 2018. The non-oil sector is expected to grow by 3% in 2018 and by 3.6% in 2019.
Other proxy indicators also paint a similarly positive picture. The PMI index has remained in expansionary territory this year, while credit to the private sector continued to trend upwards over the last few months, reaching a 19-month high in August at 5.4%.
The non-oil sector will be stimulated as the UAE government recently announced reforms to support the economy. Dubbed Ghadan 21 (or Tomorrow 21), they entail a AED50 billion (US$13.6 billion) stimulus plan that includes various measures to prop up investment and facilitate doing business in the country. Economic reforms will also be complimented by the recent approval of the largest federal budget in the country's history, of AED60 billion (US$16.3 billion), with more than half allocated to education and social development.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA) said: “The UAE economy has been adapting well to a prolonged decline in oil prices since 2014. For instance, the introduction of VAT in 2018 has been an historic milestone and is expected to substantially strengthen and diversify government revenues in the coming years.
“Continued improvements in spending efficiency, strengthening non-oil revenue, advancing to a competitive knowledge-based economy, deepening and broadening structural reforms, privatizing nonstrategic government-related enterprises (GREs), and improving the ecosystem for SME development and access to finance; would help achieve Vision 2021 goals.”
On the downside, the real estate market is yet to recover. Residential sales prices in Dubai fell by 2% year-on-year in September 2018, while Abu Dhabi saw a sharper 9.3% drop. Strong supply growth in housing, a soft jobs market and subdued demand were the main reasons behind the decline. In addition, job creation in the UAE has been quite modest this year as judged by the Emirates NBD employment index. But as the overall macroeconomic conditions continue to improve, the pace of job creation should gradually pick up.
Middle East economies are still dominated by oil sector development
Economic recovery in the Middle East is slowly gathering momentum after last year’s slump, when economic growth slowed to an eight-year low at only 0.9%. Overall, the Middle East’s GDP is expected to grow to 2.3% in 2018, though growth remains below the 2010-2016 average of 3.9%. However, oil continues to dominate and shape the macroeconomic outlook for Middle Eastern economies, despite major economic diversification efforts.
According to the report, the same factors that slowed down economic growth in 2017 are now contributing to the overall economic recovery. Oil prices have hit their highest levels since the end of November 2014 in recent weeks at more than US$80pb, oil production has been elevated in the GCC compared to last year and the fiscal stance has been expansionary in 2018 across the GCC in contrast to 2017.
As a result, the GCC governments are expected to benefit from a combination of higher oil prices and elevated oil production levels, contributing positively to oil sector growth, fiscal and external balances. The global crude oil price is forecast to average US$80 per barrel in Q4 2018, retreating slightly to US$76.5 per barrel in 2019.
On the other hand, indicators for the non-oil sector are also showing positive signs after a slow start in 2018. The PMI index, which measures the health of the non-oil private sector, slumped amid the introduction of the 5% VAT in Saudi and UAE in January 2018, but recovered thereafter and remains in expansionary territory.
Similarly, credit to the private sector, which measures bank lending to the private sector and a proxy of domestic economic activity, has accelerated in the top three GCC economies (Saudi Arabia, UAE and Qatar) in Q2 2018. Credit to the private sector in Saudi Arabia was mostly in negative territory last year and in Q1 2018, but has steadily trended up this year, reaching 1% year-on-year in August 2018, a 19-month high. While in the UAE and Qatar, the indicator has accelerated from 1.5% and 7.4% in Q1 2018 to 2.3% and 10.4% in Q2 2018, respectively, reflecting the gradual strengthening in private sector activity.
Mohamed Bardastani, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Supported by higher oil prices, oil exporters in the Middle East region will experience visible improvements in external and fiscal balances in 2018–19. Non-oil activity is also expected to continue its recovery, supported by a slower pace of fiscal consolidation.
“But despite the positive outlook, consolidation efforts should continue over the medium term. This will enable countries to mitigate the potential impact of shocks and ensure a sustainable use of hydrocarbon revenue. At the same time, continued structural reforms will facilitate private sector development and strengthen long-term resilience. Any delays on the structural reform agenda could curtail economic diversification.”
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