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Economic activity in the UAE continued its recovery in the fourth quarter and the GDP growth is forecast to pick up to 2.5 per cent and 3.5 per cent, respectively in 2021 and 2022, according to the Central Bank of UAE. Image Credit: Virendra Saklani/Gulf News

Dubai: Economic activity in the UAE continued its recovery in the fourth quarter and the GDP growth is forecast to pick up to 2.5 per cent and 3.5 per cent, respectively in 2021 and 2022, according to the Central Bank of UAE (CBUAE).

The CBUAE estimates real total GDP growth for the year 2020 to be -5.8 per cent, with the real nonhydrocarbon GDP projected to decline by 5.7 per cent.

For 2021 and 2022, CBUAE foresees non-hydrocarbon real GDP to grow by 3.6 per cent and 3.9 per cent, respectively.

The economic projections include exceptional uncertainty amidst COVID-19 repercussions and are thus subject to revisions, the CBUAE said in its quarterly review for the fourth quarter of 2020.

Real non-oil GDP growth is expected to be driven by increasing fiscal spending, pick up in credit and employment, relative stabilization of the real estate market, boosted by recovery in confidence and the Dubai EXPO in 2021.

Full recovery in 2022

In 2022, a full recovery is expected, with overall real GDP increasing. This will be the result of the continued fiscal spending growth, healthy banks’ credit growth, strong improvement in employment and recovered business sentiment, with part of Dubai EXPO 2021 taking place in 2022. Furthermore, the CBUAE expects the UAE to benefit from Qatar’s FIFA 2022 World Cup as the country is a major tourism, transit and trade hub in the region.

The central bank said the non-oil sectors improved further in Q4 2020, as lockdowns were eased and travel resumed, while the country started the initial phases of vaccine distribution.

On average, the drop in PMI [Purchasing Managers’ Index] in the last quarter of the year, compared to the same period in 2019 was reduced to only -0.9 per cent, reaching the expansion zone of 51.2 in December. This reflects also the better sentiment boosted by the preparation for the Dubai EXPO.

The central bank noted that data from key economic sectors points to sustained economic recovery for the next two years and beyond.

Real estate

The central bank report said the residential real estate price decline slowed significantly in the fourth quarter of 2020, with prices in Abu Dhabi registering monthly gains in all months of the second half of 2020 and employment picked-up, marking four consecutive months of month on month increase as of December 2020.

Tourism

Tourism and hospitality data in Abu Dhabi in November and December show a recovery in occupancy and revenue, the best performance achieved since February 2020, owing to the resumption of international travel.

The Oxford Stringency Index1 moved from 51 at the end of Q3 to 49 at the end of December 2020, indicating further opening of the economy. This benefited the UAE, given its role as a regional trade, transportation and travel hub.

Fiscal stance

The consolidated fiscal stance in the third quarter of 2020, the most recent period for which data is available, the net operating fiscal balance recorded a deficit of Dh4.6 billion, due to the fall in revenues by 38 per cent year on year to Dh67.8 billion, while expenditures declined by 21.7 per cent Dh72.4 billion. Both, deposits and gross credit rose on a yearly basis despite the economic contraction, while decreasing on a quarterly basis.

Inflation

Consumer price inflation remained negative in the fourth quarter. This was the result of a significant drop of 3.5 per cenet in the price of non-tradables, (goods and services that are not traded across borders, therefore their prices are mainly determined by domestic supply and demand).

Meanwhile tradables’ prices rose by 0.1 per cent. Tradables prices, accounting for 34 per cent of the CPI consumption basket, increased in Q4 mainly due to the increase in the price of food and soft drinks; beverages and tobacco; and textile, clothing and footwear. Prices of food, beverages and tobacco increased to a lesser extent than in the third quarter.

The continued decline in the housing component (34 per cent weight in the consumer basket) by 3.4 per cent year on year, transportation by 6.2 per cent; and recreation and culture by 25.3 per cent were the drivers of the significant drop in non-tradeables during Q4.

Financial soundness

The financial soundness indicators remained healthy, supported by the enhanced Targeted Economic Support Scheme (TESS), which was extended in November to extend loan re-payment deferrals and other regulatory relief measures until June 2021. Finally, the 3-month USD LIBOR fell on average during the fourth quarter of the year, while the spread between EIBOR and the USD LIBOR declined, reaching 19 bps at the end of December.

Oil impact

The central bank report said, as an oil exporter, the UAE is likely to feel the fallout from reduced global demand for oil due to the contraction in economic activities worldwide, including transportation and international travel. UAE oil production fell by 17.7 pr cent year on year in Q3 and by 18.2 per cent in Q4, in line with the agreement by OPEC+. Real oil GDP is estimated to have contracted in 2020, corresponding to an average oil production of 2.78 mb/d for the year as a whole.