The UAE economy is rebounding fast from the downturn caused by COVID-19, multiple reports from key regulators showed these recent weeks. But how fast are these sectors bouncing back. Also, how does this benefit your spending and your money matters in general? Read to find out more.
Dubai: The UAE, the Arab world's second largest economy, is rebounding fast from the downturn caused by COVID-19 and the prolonged decline in oil prices, global and regional regulators reported these past weeks. But how fast is the economy rebounding and how does it stack up against our routine finances?
Economic activity in the UAE is recovering at a faster pace and economic growth is forecast to pick up by over 2 per cent and above 4 per cent, in 2021 and 2022 respectively, according to recent forecasts from the Central Bank of the UAE (CBUAE), the World Bank and the International Monetary Fund (IMF).
These latest official projections from government agencies and also independent sources such as the IHS Markit and the Institute of International Finance (IIF), which is a grouping of banks and financial institutions worldwide, show that the UAE has rapidly made its return to a resurgent growth trajectory.
The accelerating momentum seen in economic recovery is supported by one of the highest vaccination rates in the world, recovery in oil production, rebound in tourism, activities related to the Expo 2020 in Dubai, these regional regulators and international monitoring agencies revealed in their latest reports.
The UAE economy benefited from a recovery in global travel and a pick-up in demand in the second quarter, the central bank further noted. According to the UAE Central Bank forecasts, the economy is set to grow at 2.1 per cent this year and double its GDP growth year on year to 4.2 per cent in 2022.
The UAE Central Bank in June had forecast UAE real gross domestic product growth of 2.4 per cent this year and 3.8 per cent in 2022. In 2020, COVID-19 and its economic fallout led to a contraction of UAE GDP by 6.1 per cent.
The World Bank has projected GDP of the UAE will average 3.4 per cent between 2021 and 2023. It projected 2.7 per cent GDP for 2021, 4.6 per cent for 2022 and 2.9 per cent for 2023.
Economic recovery to be boosted by money made in the tourism sector: World Bank
“Over the medium term, the recovery will be bolstered by trade and tourism as health concerns wane,” World Bank said in its latest update about the UAE.
Tourism and hospitality data in Abu Dhabi and Dubai show a recovery in occupancy and revenue, owing to the resumption of international travel.
“The rapid roll-out of COVID-19 vaccines is expected to boost domestic spending and lead to a recovery in tourism. This coupled with a recovery in global trade, rising oil production and higher oil prices, will support recovery in the medium term,” noted the World Bank in its recent report.
Real estate market is making a comeback in the UAE
The UAE real estate market - a vital economic sector in the country - has improved, government and regional economists revealed.
Prices in Abu Dhabi registered year-on-year gains for the second quarter running, the first time it has done so in more than five years. Prices in Dubai were still declining in the second quarter, although at a slower pace, said the UAE Central Bank.
With many making use of lower real estate prices in the UAE, property demand has been making a gradual comeback, which led to higher property prices as a result.
Moreover, employment rates has been picking up as well. (Higher employment from the economy’s standpoint implies higher income and spending power, again, leading to higher demand.)
In the long-term, employment growth rates in the UAE is projected to be around 2.10 per cent in 2021 and 3 per cent in 2022, according to global analytics firm Trading Economics’ economic metric models.
How UAE household spending rebounded
Economists have been tracking a normalised household spending pattern over the past months, with consumer spending nearly doubling since March last year. Spending in restaurants and consumer spending on apparel too nearly doubled.
Retail sales in the UAE are expected to rebound and grow by 13 per cent to reach $58 billion (Dh213 billion) by the end of 2021, supported by consumer demand in the second half of the year, analysis from Dubai Chamber of Commerce and Industry projected earlier.
UAE leads the Middle East region in household spending on e-commerce at $2,554 (Dh9,380) per household, which is twice the value of the global average of $1,156 (Dh4,245), and four times the value of the average in the Middle East region ($629 or Dh2,295).
How quickly is spending set to improve in UAE households?
Global credit rating agency Fitch forecasts real household spending in the UAE to post growth of 3.5 per cent in 2021, a recovery from the 5.6 per cent contraction in household spending estimated over 2020, caused by the COVID-19 pandemic and related lockdown measures.
“While the consumer spending recovery from the COVID-19 pandemic made a start in 2021, we believe that it will spill into 2022, driven by COVID-19 restrictions in the first-half of 2021 and a protracted recovery in the country's international tourism industry,” the economists at Fitch noted.
Fitch expects vaccination drives to bode well for consumer spending in the UAE as a high vaccination level should prevent the government from implementing new more stringent restrictions on consumers and the retail sector.
Doesn’t higher spending imply more inflation on the things I buy?
When there's a surge in demand for goods across an economy, prices increase, and the result is inflation. Economic expansion has a direct impact on the level of consumer spending in an economy, which can lead to a high demand for products and services.
Prices, affected by the rate of inflation, naturally impact consumer spending on goods significantly. Higher inflation rates erode purchasing power, making it less likely that consumers have excess income to spend after covering basic expenses such as food and housing.
However, consumer prices are forecast to remain broadly steady this year as compared with a deflation of 2.1 per cent in 2020, on the back of higher global commodity prices and recovery in domestic demand.
While new government spending is needed to stimulate the economy, one reasoning is that an increase in government purchases might drive up the cost of production. In turn, this would drive up inflation.
Oil’s role in economic recovery and your finances
Oil revenue is the UAE government’s main source of revenue and therefore any recovery in oil prices will boost the government’s ability to maintain high level of continued monetary stimulus and therefore aid in economic recovery.
With the world’s seventh largest proven crude oil reserves, the UAE continues to be a dominant player in the global energy space. Oil exports account for around 25 per cent of the UAE’s overall exports.
As such, the economy’s prospects is not just linked to overseas trade and tourism but also with oil prices. While demand for oil is still lower than normal, hopes of a speedier than expected economic recovery on a quicker vaccine roll-out are being met currently.
Oil prices are often seen as a barometer for economic activity. Termed ‘black gold’, oil has now reached three-year highs at $80 (Dh312) a barrel having risen more than 26 per cent in the last six months.
What does recovery in oil prices mean for your fuel expenses?
Oil prices have determined at least half of the price of each gallon (3.78 litres) of fuel over the last decade. As oil prices change daily, fuel prices are constantly fluctuating, too. The rest of the price of gas is based on refinery and distribution costs, corporate profits.
Last year, the combination of an oil price war and a worldwide pandemic helped to send the price of oil below zero, to nearly -$37 (negative Dh135) per barrel. Oil prices subsequently moved into positive territory, but the price of fuel remained lower than usual in most countries worldwide.
The fuel prices in the UAE are adjusted to international oil prices. The Organisation of Petroleum Exporting Countries (OPEC) and its allies rescued the global oil industry from an unprecedented slump last year by slashing production when the coronavirus crisis pummeled demand. The strategy has revived international oil prices, shoring up revenues for the producers’ battered economies.
OPEC revealed recently that said it expects global demand for products such as petrol and diesel to increase, supported by a recovery in post-pandemic mobility and industrial activity.
As a result petrol and diesel prices in the UAE have changed after remaining stagnant for almost a year. Petrol and diesel prices have witnessed a steady increase over the last six months.