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Non-oil economic expansion and wage growth are identified as critical factors counteracting inflation and contributing to the UAE's economic resilience. Image Credit: Gulf News Archive

Dubai: Dubai and Abu Dhabi have witnessed a notable rise in their global rankings for cost of living, securing the 18th and 43rd spots respectively, according to Mercer’s Cost of Living 2023 report.

One of the key drivers behind the changes in 2023 rankings is the surge in rental costs, with Dubai being the second city, after Singapore, to experience significant rent increases averaging 25 per cent. By contrast, the impact of housing movement has been notably lower in Abu Dhabi, where the change ranges between 6-8 per cent and in some areas remains the same as last year.

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In addition to rental hikes, the report identifies an increase in the cost of living across various categories in both Dubai and Abu Dhabi. Supermarket food prices have risen by up to 11 per cent, transportation by 4 per cent, and sports and leisure by 5 per cent. However, the UAE’s economic fundamentals, driven by non-oil economic expansion and wage growth, contribute to countering inflation and bolstering the country’s economic strength.

“Employers in the UAE are taking note of these changes. Our research indicates that organizations have provided an average of 4.2 per cent annual merit increase in 2023,” said Vladimir Vrzhovski, Financial Services and Technology Industries Lead at Mercer Middle East. “Many of them are reviewing their remuneration packages, with a growing number increasing bonuses instead of increasing base salaries to increase the total compensation without long term commitment.”

“Our research shows that as a response, 40 per cent of the surveyed organizations have reviewed their 2023 policies by increasing their housing allowances on average by 5-10 per cent based on the career level,” he added.

Attracting international businesses and talent
Cost is not the only factor that influences how attractive a location is to employees and corporations. An equally important factor is the overall quality of life that a city offers. Conversely, risks and other negative issues, such as natural disasters, political and/or economic turmoil, high crime rates, poor infrastructure and inadequate international connectivity, can be major deterrents to companies and their employees.

In general, countries and cities are continuously striving to attract international businesses as well as digital nomads and mobile employees. The most successful locations are currently those combining flexible governance for mobile talent, a high quality of life and a reasonable cost of living.

Competitive cost of living

Despite the rising rankings, the UAE’s cost of living remains competitive compared to major global cities. The changes in rankings are attributed to factors such as inflation, housing costs, and exchange rate fluctuations. The UAE has been proactive in managing these issues, reflecting its strong economic resilience.

According to the report, Hong Kong (first) retains its position as the most expensive city for expatriates, followed by Singapore (second), which climbed to the second spot. Global hubs like London (17th) and Amsterdam (28th) have dropped a few spots, while New York (sixth) has climbed up by one spot in the rankings.

Among Middle Eastern cities, Tel Aviv stands as the costliest for international employees, ranked eighth, while Cairo ranks 217th and Amman ranks 110th.

How has the cost of living crisis affected organizations and their talent?
The key factors that have shaped the world’s economy in 2022 will continue to exert an influence into 2023. More than a year after the escalation of the Russia-Ukraine crisis and the emergence of more contagious COVID-19 variants, many economies are still absorbing the shocks produced by these events.

Due to the recent introduction of aggressive national monetary policies and the tightening of global financial conditions, many economies are likely to see slower income growth this year, along with rising unemployment.

Debt levels among many countries remain high and core inflation has not yet peaked in many markets. Inflation and exchange-rate fluctuations are directly impacting the pay and savings of employees who are internationally mobile.