This information was last updated on 02 MAR 2012, 11:55 AM EST (16:55 GMT)
Outlook and Assumptions: Outlook
The UAE economy has largely shrugged off the regional turmoil, expanding by an estimated 5.4% in 2011, but faces stiffer headwinds going forward. Headline economic growth certainly will not see the same kind of support from the oil sector in light of the weakening external environment, with oil GDP growth easing back to 2.6% in 2012. Meanwhile, non-oil GDP will see softer growth as well, rising by 4.5% this year. Weaker external demand is expected to result in somewhat slower growth in trade and tourism; however, healthy demand from within the Middle East and Asia should prevent a repeat of the collapse in trade and tourism activity during 2009. Businesses and households will also likely err on the cautious side in terms of spending plans, at least over the next couple of quarters, given the deteriorating economic and financial conditions around the globe. Overall, we see real GDP growth edging down to 3.9% in 2012, before rising to 4.1% in 2013. Risks to the economic outlook remain. The UAE economy could very well see a bumpy road ahead, given the global growth slowdown and the escalating sovereign debt crisis in Europe. At this stage, however, growth in emerging markets is likely to be sustained at a still-healthy pace, which, coupled with the support from high oil prices, should help underpin activity in the UAE economy in 2012.
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With regards to the slumping real estate market, new supplies coming online have added to the supply overhang and further depressed prices, and we see the recovery dragging on through mid-2012 as well. Moreover, with the completion of numerous projects in 2011, activity in the property market will likely drop off as the public and private sectors takes a more prudent approach to real estate development. Heightened financial-market volatility also threatens to dampen business and economic conditions, and could have repercussions for the UAE’s still-tight credit conditions and troubled state-owned firms seeking to refinance or roll over maturing debt obligations. UAE banks will likely remain cautious in boosting lending, but should continue to loosen credit in 2012. Inflation will remain in check. UAE inflation remained tame in 2011, and although we expect prices to rise over the coming year, inflation should be moderate in 2012. Food is likely to continue to be the main inflation driver in the coming months, but softer commodity prices could help take some of the sting out of inflation. House prices are expected to remain depressed for a while longer, given the supply overhang and soft demand, but we do believe that house-price deflation has neared its peak and should begin to ease through the first half of 2012. We see annual inflation gradually accelerating over the coming year as domestic demand holds strong and a recovery in the property market begins to cement itself by the end of the year. Consequently, IHS Global Insight projects headline inflation in the UAE rising to an average annual rate of 2.1% in 2012. CPI inflation should also see some strain from base effects, but prices are likely to rise more moderately this year before edging higher in 2013.
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Outlook and Assumptions: Domestic Assumptions
Economic growth in the United Arab Emirates will ease back in 2012 given the weakening external environment. The economy could see a bumpy road ahead, as it faces stiffer headwinds from the global growth slowdown and sovereign debt crisis in Europe. After ramping up production in 2011, UAE crude-oil output is projected to grow only modestly in 2012 as global energy demand softens with the downturn in the world economy. The world’s real GDP growth is projected ease back to 2.7% in 2012, before bouncing back up to 3.6% in 2013. Although economic fundamentals point to only a mild global slowdown in 2012, there is a risk that a dangerous mixture of financial-market anxiety, political paralysis, and policy mistakes could darken the outlook. Global oil prices are expected to remain in triple digits in light of the risk premium from the political upheaval currently gripping the Middle East and North Africa region. Our Brent oil-price forecast has been raised to an
Created on 05 Mar 2012
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