Economic slowdown to persist through next year, recovery seen in 2017

Dubai: The UAE economic growth is expected to slow down to 2.9 per cent in 2016 from an estimated 3.8 per cent in 2015, driven by deceleration in the oil sector and a moderation in government spending, according to Standard Chartered’s Economic Outlook 2016.

"We forecast the real GDP growth will pick up to 3.6 per cent in 2017 on higher oil prices leading to a rebound in government-driven project spending,” said Carla Slim, Economist, Mena, Standard Chartered.

The UAE’s oil production is estimated close to the full capacity with a projected slowdown of one per cent in 2016. “We see limited further upside to Abu Dhabi’s oil production in 2016 after it increased oil production by 7 per cent year on year in September 2015 to 2.9 million barrels a day,” said Slim.

The oil output declined to 2.9 million bpd in September from the July peak of 3 million bpd suggesting the current levels are near full capacity.

The UAE’s non-oil sector growth is also expected to slow further on the back of slower government spending. The UAE’s Purchasing Managers’ Index (PMI) data for the last few months show the persistent slowdown with the October PMI hitting a two-and-half year low and recovering marginally in November.

“We think government spending is trending lower and will remain low in 2016. This will weaken non-oil growth dynamics in the coming year,” Slim said.

Impact of economic slowdown is expected to be visible in key sectors such as construction and retail which have already been impacted. In the first half of 2014 $11 billion (Dh40.4 billion) of new construction and infrastructure contracts were awarded compared with $21 billion awarded in the same period last year. The reduced construction activity amid weaker government-driven project sector is projected to slow to 3 per cent in 2016 from an estimated 5 per cent in 2015 and an actual growth of 7.3 per cent in 2014.

Dollar strength

Global economic trends are also seen impacting Dubai’s open economic model. “The retail sector has been particularly affected by broad-based dollar strength, a weak euro and a weak Russian rouble. These factors make Dubai relatively — a negative for the luxury retail segment,” said Slim.

Retail sector is projected to grow at 2.5 per cent in 2016 compared to Standard Chartered’s own estimate of 4 per cent growth in 2015 and actual growth of 5.6 per cent in 2014.

Tightening liquidity and slower demand for credit is already reflected in credit growth. Bank credit growth to the private sector slowed to 5 per cent year on year in September from 10 per cent in March. “We expect it to average 4 per cent in 2016. Private sector borrowing requirements will likely be lower as infrastructure spending slows and government-driven projects postponed,” Slim said.

While monetary policy is expected to mirror the rate tightening by the Fed, on the fiscal side, Standard Chartered economists expect further tightening of government spending.