Inflation collapses as EIU predicts UAE recession

Inflation figures from the Abu Dhabi-based Statistics Centre show a dramatic fall in inflation from 14.9 per cent last year to just 1.2 per cent for the first nine months of 2009, while the Economist Intelligence Unit now forecasts a four per cent fall in GDP this year in the UAE.

But the latest October report from the EIU predicts that UAE inflation will rise back to 4.2 per cent in 2010 and 6.5 per cent in 2011 as the economy recovers. For 2010 GDP growth will be positive 4.1 per cent and for 2011 growth will be 5.5 per cent, says the EIU.

Great Recession impact

The report notes that the UAE economy has been hit hard by the global downturn, especially in Dubai where the real estate boom has bust. Opec-mandated oil production cuts have also hampered oil exports from Abu Dhabi, with export earnings forecast to fall by 27 per cent this year.

For 2010 the EIU predicts a steady recovery in oil production with several large new projects coming on stream, and tourism picking up in Dubai from late 2009. But the report still has a ‘bias to the downside’ as the world faces the possibility of a double-dip recession and a renewed downturn in late 2010.

The EIU report does not dwell on the debts outstanding in Dubai, and assumes that the UAE banking sector will not suffer any more shocks during its forecast period. That might be a fairly bold assumption particularly in the event of a double-dip recession and the further pressure that would put on local business now suffering both from reduced activity and the non-payment of invoices.

However, by the end of 2011 the EIU is confident that the financial sector will have stabilized and that inflation will once again be the enemy targeted by the Central Bank.

Consolidation first

So for the next two years the UAE is facing a period of consolidation after the end of the oil boom, with the brunt of the downturn felt in Dubai rather than Abu Dhabi where the excesses of the real estate boom have been less and where government spending is easily sustainable.

Quite how a double-dip global recession scenario would be played out in the emirates is barely considered in the EIU report, although it clearly will have a crucial impact on the oil price and trade flows within the forecast period.

The EIU assumes average oil prices of $74 in 2010 and $67 in 2011, and any variance to the upside or downside would have a significant impact on UAE growth prospects. Local business will be hoping that reports of recovery do not prove exaggerated.