UAE inflation seen rising to 2% in 2014 on higher property prices

Inflation in UAE is expected to average two per cent this year from 1.1 per cent last year on higher house prices in Dubai, Business Monitor International (BMI) said in its revised forecast.

“Inflation continues to tick higher in the UAE, with Dubai leading the price rise. We forecast inflation to average 2.0% in 2014, up from 1.1 % in 2013. The key driver of inflation in the UAE will be house prices, as the inflationary impact of food diminishes,” BMI said.

On the back of a stronger-than-expected recovery in Dubai’s residential property sector, it revised up 2014 average inflation forecast, and now project the headline print coming in at 2.0% this year.

Earlier this month, Moody’s Investor Service also forecast rise in UAE inflation this year. “Despite the governments’ efforts to moderate price increases, inflation has picked up in Saudi Arabia, Qatar and the UAE, and we expect it to rise further in 2014 for all countries except Bahrain,” the ratings agency said.

BMI projected relatively solid growth over the coming quarters, with UAE real GDP forecast to expand 3.9% and 4.1% in 2014 and 2015, respectively.

The outlook for Dubai has become more promising as the emirate benefits from increased activity in the trade and tourism sectors, in addition to the all-important real estate industry is now on the road to recovery. Credit growth to the private sector will remain anaemic through 2014 as commercial banks continue to increase provisioning against potential loan losses due to the debt funding cliff.

“We maintain our bullish outlook on the UAE's economies as a wealth of data points to continued growth. Consumer and business sentiment remains positive, underlining our particularly bright outlook for household consumption and fixed investment over the coming quarters,” BMI said.

“We hold a bullish outlook on Dubai's economy over the coming years as a whole host of sectors possess significant growth prospects. We expect the emirate to become an increasingly important growth driver in the UAE as the emirate records the fastest GDP growth rates on the back of the tourism, real estate and retail sectors.”

However, it predicted a broad slowdown for Abu Dhabi over the coming years as gains in the crucial oil sector become harder to maintain. “We forecast Abu Dhabi's real GDP growth to reach 3.5% in 2014 and 3.2% in 2015, following an estimated 3.6% in 2013. This forecast lags our expectations for the UAE as a whole as the non-oil sector will be unable to maintain the former growth reached by the larger oil sector.”

The report is also bullish about its outlook for the emirate of Sharjah, largely on the back of positive forecast for Dubai. Sharjah will benefit from rising housing costs in neighbouring Dubai which should push up demand for the former's own housing sector. In addition, Sharjah's growing shipping and tourism reinforce sanguine outlook for the emirate.

BMI also expects 2014 to be a key year for the global Islamic finance industry as several new markets come to the fore.

“It has been our long-held view that rather than becoming an integrated global financial system, Islamic banking will see the creation of regional hubs. Even with this slightly fragmented outlook, we still expect significant growth for the sector.”