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UAE economy likely to rebound in 2018

dubai - This will be driven by oil prices, an expansionary fiscal stance and an upswing in investment

The UAE economy is expected to grow faster in 2018, driven primarily by recovering oil prices, an expansionary fiscal stance and an upswing in investment ahead of Expo 2020.

Analysts at the Institute of Chartered Accountants in England and Wales (ICAEW) said the UAE's GDP growth would bounce back to 2.6 per cent in 2018 after a difficult year, when growth slowed to a seven-year low to 1.5 per cent in 2017.

Last month, the Central Bank of the UAE lifted its growth forecast for the country's non-oil GDP to 3.9 per cent in 2018 from 3.6 per cent on the back of improving domestic economic activity and better prospects for the global economy. The regulator said economic activity has continued to improve during the first quarter of 2018, underpinned by the revival of oil prices and a stronger growth in non-oil activity.

The accountancy and finance body in its 'Economic Insight: Middle East Q2 2018' report produced by Oxford Economics, however, warned that general prices are expected to increase as inflation will rise to four per cent this year.

"The UAE's growth will be primarily driven by recovering oil prices, an expansionary fiscal stance at the federal and emirate levels, a buoyant trade and tourism environment and a pick-up in investment ahead of Expo 2020 in Dubai," it said.

Michael Armstrong, ICAEW regional director for the Middle East, Africa and South Asia, said the UAE is on the right track to economic diversification and is implementing necessary fiscal reforms to support these efforts.

"The introduction of VAT is an important step towards 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," said Armstrong.

"Oil sector growth is expected to be limited this year, especially given the UAE's increasing compliance with the production cuts, which averaged 124 per cent in the first three months of this year," the report said.

In 2017, the oil sector contracted by 1.6 per cent, mainly because of the Opec-plus mandate that saw the UAE cut its oil production by 150,000 barrels per day (b/d) from an average of 3.09 million b/d in fourth quarter 2016 to an average of 2.89 million in the fourth quarter of 2017, representing a drop of nearly 6.4 per cent.

The report said the non-oil sector on the other hand proved to be resilient last year despite the unfavourable macroeconomic environment and regional economic slowdown, growing by three per cent. "The non-oil sector is expected to grow 3.7 per cent in 2018, supported by improving business sentiments, a buoyant trade and tourism environment and higher public spending. Since the UAE is a highly open economy with trade value accounting for more than twice the country's GDP, any growth in regional and global economic activity will contribute positively to the country's economic output this year."

According to the ICAEW, the outlook for the UAE's tourism industry is highly positive.

"More positively, the UAE federal government is expected to increase spending by 5.6 per cent. Dubai, which traditionally accounts for 25 to 30 per cent of the UAE's GDP, will lift spending by 20 per cent in preparation for Expo 2020, with the allocation for infrastructure alone leaping by 46.5 per cent. The UAE continues to be the top destination in Mena for inward FDI, attracting $11 billion in 2017," said the report.

Mohamed Bardastani, ICAEW economic advisor and senior economist for Middle East at Oxford Economics, said Middle East economies will see a pick up in GDP growth this year and in 2019 but "this doesn't mean we should let complacency set in".

With growing global trade tensions, geopolitical risks and rising interest rates, economic reforms are more necessary than ever in order to ensure stronger, sustainable and inclusive growth," he said.

- issacjohn@khaleejtimes.com