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Dubai: Economists expect UAE government spending to remain expansionary this year despite lower oil prices and output. Together with pro-growth policies, government spending is expected to fuel faster growth in the country’s non-oil sector.

“We maintain our 2019 GDP growth forecast of 3.3 per cent. We raise our 2018 forecast to 2.9 per cent from the previous forecast of 2.6 per cent, reflecting the significant increase in [the second half of 2018] of [oil] output,” said Bilal Khan, a senior economist at Standard Chartered.

UAE Purchasing Managers Index (PMI) data for the first 11 months of 2018 indicated that the non-oil private sector growth is under pressure.

The average PMI figure up to the end of November stood at 55.7, marginally lower than the 55.9 recorded in the same period in 2017, and signalling that the non-oil private sector grew at a similar rate to 2017.

Official data showed that the UAE’s non-oil sector grew by 2.5 per cent in 2017.

Analysts do not expect to see any significant changes in the government’s fiscal policy in 2019 despite the weaker oil revenue outlook. They expect the government to remain focused on supporting the economy.

“Our non-oil GDP growth outlook remains broadly steady and we see only a measured rise in real non-oil GDP growth to about 3 per cent in 2019, from 2.6 per cent estimated for 2018,” said Monica Malik, chief economist at the Abu Dhabi Commercial Bank (ADCB).

Fiscal loosening

“A gradual loosening in fiscal policy and strengthening in investment activity [Expo-led in Dubai, hydrocarbon-driven in Abu Dhabi] is behind this forecast rise.”

The non-oil sector is expected to face multiple challenges that range from a rise in funding costs, lower consumption growth driven by slow employment growth, and a drag (though fading) from the introduction of value-added tax (VAT) a year ago.

Lower oil revenues are likely to have an indirect adverse impact on non-oil sectors, although the government remains committed to its support.

“Our expectation of faster non-oil sector growth of 3.5 per cent in 2019 on announced policy support measures will likely be offset by lower oil production in the second half of 2019 on the back of the UAE’s participation in the Opec+ output cut agreement,” said Khan.

Opec+ is the alliance of the Organisation of Petroleum Exporting Countries (Opec) and non-Opec oil producers.

Margin pressures

The latest PMI data revealed an acceleration in input cost inflation in 2018 on the back of higher purchase costs.

However, firms were unable to pass on these higher costs, with average selling prices declining further.

Purchasing activity and an accumulation of pre-production inventories was sharply higher in 2018 compared to the previous year. While some of this might be attributed to pre-VAT stockpiling. Survey respondents indicated they had boosted inventories ahead of an expected upturn in sales.

On the price front, sales prices continued to fall for a third month running in November, with average cost burdens rising at a solid rate during the latest survey period. November’s PMI data thereby lengthened the sequence of rising operating expenses to six months.

According to economists, the ongoing correction in the property market and a weakening external backdrop should negatively impact key non-oil sectors. Analysts see oversupply in a number of sectors such as hospitality, retail and real estate.