Dubai: The UAE economy is expected to grow by 2.6 per cent this year and 3.8 per cent in 2019, according to a new report by the Institute of Chartered Accountants in England and Wales (ICAEW) and Oxford Economics.

The primary growth drivers will be recovering oil prices, expansionary fiscal policies at both federal and emirate levels, buoyant trade and tourism, and investment pick-up ahead of Expo 2020 Dubai, according to Economic Insight: Middle East Q2 2018.

However, the report warned the expansion would likely increase inflation by 4 per cent this year, in part driven by the introduction of 5 per cent value-added tax (VAT) in January.

Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and south Asia (MEASA), said, “The UAE is on the right track to economic diversification and is implementing the necessary fiscal reforms to support these efforts.

“The introduction of VAT [value-added tax] is an important step toward diversifying government revenue and building tax capacity. We’re also encouraged by the recent announcements to reform business ownership laws and residency visa rules. This will definitely help in attracting more foreign direct investment and in creating more stability in the market.”

The report noted that although the oil sector contracted 1.6 per cent last year, and growth would be limited throughout 2018, the UAE’s non-oil sector was resilient, growing 3 per cent despite an unfavourable marcoreconomic environment and regional economic slowdown.

The non-oil sector is expected to grow 3.7 per cent in 2018, supported by improving business sentiment, buoyant trade and tourism — tourism grew 5.5 per cent in 2017, a trend expected to continue — and higher public spending.

The UAE federal government is expected to increase spending by 5.6 per cent year-on-year, with Dubai raising spending by 20 per cent in preparation for Expo 2020 Dubai.

The uptick in the economy is expected to drive some recovery in the real estate sector, which saw falls of 4.7 per cent in Dubai’s residential sector and 7.2 per cent in Abu Dhabi’s residential sector in 2017.

Regional growth is also expected to rise, with average GDP across the Middle East reaching 2.4 per cent in 2018, up from 1 per cent in 2017.

Within the GCC, GDP growth is expected to be 2.3 per cent in 2018, up from 0.1 per cent in 2017, accelerating further as the Organisation of Petroleum Exporting Countries (Opec) increases production.