Despite a modest setback at the turn of the year, the UAE GDP is forecast to grow by 6.2 percent in 2022, and 6.7 percent in 2023, backed by expansionary government policy and the surging oil sector

The UAE’s economic recovery is on a firm footing, amid lingering Omicron concerns and uncertainty over the sharp escalation of the Russia-Ukraine conflict, according to the latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics.

Despite a modest setback at the turn of the year, growth momentum is expected to pick-up in the coming months as expansionary government policy and inflated oil prices drive GDP growth forecasts.

Oil prices have risen above $100 per barrel, for the first time since 2014, amid heavy western sanctions on Russian energy producers.

Given that the UAE is among the few countries with spare oil capacity, a surge in UAE oil output is predicted over the next two years, as it gradually raises production in response to pressure from consuming countries to ratchet up supplies.

UAE oil and non-oil GDP outlook

According to the report, the UAE GDP is forecast to grow by 6.2 percent in 2022, and 6.7 percent in 2023, driven primarily by a surging oil sector.

ICAEW expects a 12.8 percent rise in oil GDP this year and oil output to average 3.1 million b/d.

The outlook for UAE non-oil GDP is also encouraging and predicted to grow by 3.9 percent in 2022 and 2.5 percent in 2023.

Expansionary government policy will continue to provide impetus to activity and the recent reform agenda should also bear fruit.

Coupled with energy inflation, the UAE’s budget surplus should increase to 9 percent of GDP this year, a significant jump on the previous estimate of 3.6 percent in 2021, the report stated.

Impact of reforms in the UAE job market

New labour law reforms came into force in February, providing a more flexible working landscape and positively influencing job creation in the private sector, according to the latest PMI survey.

The rules guarantee more flexibility and further protection to employees, helping to attract talent and contributing to greater investment and involvement by expats in the local economy.

Changes include a shift in the work week to Monday-Friday, from Sunday-Thursday, to align with a larger part of the world. Meanwhile, public sector working hours have been reduced to 4.5 days per week.

While evidence of the productivity gains of reducing the working week is tentative, having only been trialled on a small scale globally, an increase in worker well-being should entice job seekers to the local market.

Reforms also appear to be paying off on the investment front. Foreign direct investment (FDI) in Dubai rebounded strongly between January-September 2021, climbing to $4.3 billion (AED 15.9 billion), and creating over 16,000 new jobs.

There is an expectation that Dubai will see another strong year, continuing to grow its share of foreign investment even as regional competition intensifies.

Steps to diversify the tax base will also help mitigate the economic impact of an unstable global market.

Looking forward: Corporate tax, Expo 2020, travel and tourism

In June 2023, the UAE will introduce for the first time a corporate tax of 9 percent on domestic and foreign firms.

The planned introduction of a corporate tax rate, which remains below the Global Minimum Corporate Tax rate, is an important step to support non-oil revenue and provide greater scope for the government to direct funds to priority sectors.

Expo 2020 Dubai has provided a notable boost to the tourism industry, however visitor numbers are yet to bounce back to pre-pandemic levels suggesting further growth in 2022 can be expected.

The travel and tourism industry accounts for 16 percent of the national GDP and 30 percent in Dubai, making its resurgence key for economic rebound in the UAE.

The ICAEW Head of Middle East, Vanessa Heywood, said: “The UAE’s post-Covid economic prospects were already on a strong footing and will be further boosted by the recovery in both oil and non-oil revenue. The increase in government finances certainly bodes well for investment into the country’s Year of the 50^th projects.

“Coupled with accelerated government efforts to attract foreign investment, the UAE’s economic outlook is encouraging and is expected to withstand the challenges of higher energy and food costs as well as global financial market disruption caused by the Ukraine-Russia conflict.”

The ICAEW economic advisor, and chief economist and managing director at Oxford Economics Middle East, Scott Livermore, said: “High inflation, initially due to Covid, and since driven higher by the conflict in Ukraine, remains the greatest concern for global markets. However, the UAE is well positioned to remain robust with both oil and non-oil sectors performing well.

“Although the announcement to introduce corporate tax made headlines in the region, and could hinder growth in the short term, it does provide greater scope for the government to direct funds to priority sectors to achieve its growth and diversification goals.”

ICAEW reported that inflation in the UAE  remains lower than in many other countries, but prices may take longer to peak given renewed global food and energy pressures.

Overall, ICAEW forecasted inflation to rise to 2.5 percent in 2022, from 0.2 percent last year, before stabilising below 2 percent in 2023-24.

Key to where inflation in the UAE settles once the impact of global supply-chain disruptions and food price inflation passes is the development of prices in the housing, water, electricity and gas, and critically, the evolution of residential rents.

SOURCE: arabianbusiness.com