UAE inflation could climb down to 2.5% this year

Dubai: The UAE Government has the strength to fight a slowdown in the economy through increased fiscal spending but growth will drop this year amid global economic troubles, Standard Chartered Bank said in a report yesterday.

It noted that higher spending proposed in the federal and Dubai budgets points to government willingness to boost economic activity.

However, despite budget and current account surpluses, the UAE cannot escape the effects of the global downturn, report said, projecting the gross domestic product (GDP) growth of 0.5 per cent this year compared with 4.8 per cent in 2008.

The first half is expected to be the worst but the good news is that inflation will decline from 12 per cent last year to 2.5 per cent this year.

"Positive structural factors [surpluses, diversification, and infrastructure investment] should allow the UAE to stage a modest recovery in the second half, with the economy performing better in 2010," the bank's economist Mary Nicola said in her analysis.

She said budget and current account surpluses would allow the government to increase fiscal spending to combat the slowdown.

At Dh42.2 billion, the UAE federal budget for 2009 is the country's largest ever and 21 per cent bigger than 2008.

According to Gulf Research Centre economist Eckart Woertz, key infrastructure projects in the country are likely to go on despite the downturn.

"Vital infrastructure projects like the Dubai Metro will go ahead, but there are clear signs of reprioritising investments. Not every planned project will see the light of day," he told Gulf News.

"Like elsewhere in the world, the UAE Government reacts with a mixture of fiscal stimulus and monetary easing. Even if slight budget deficits should occur, there are enough savings from the good times to finance such expenditure. The government could also issue debt as its finances are fundamentally sound," Woertz said.

The impact of the downturn is being felt most acutely in the real estate sector, which had contributed substantially to the GDP growth in last few years.