Economic growth in the UAE may slow down to 6.8 per cent this year, a Standard Chartered economist has warned. The country’s fiscal surplus could fall if GDP growth cools as a result of a fall in the average oil price, with a likely impact on investment in infrastructure and asset expansion, other analysts said.
Amid a slowdown in the US economy, oil price forecasts for the year are bearish with the consensus average at $78 per barrel of Brent crude. The US economy is starting to feel the consequences of sustained high crude oil prices, fuelling concerns about a recession, US Energy Secretary Samuel Bodman said.
“Our economy has been able to withstand the big runoffs in [oil] price but I believe it is starting to have an impact on our economic activity,” Bodman said in Cairo.
Bodman’s tour of the Middle East comes a week after US President George W Bush’s trip to the region.
“We estimate oil prices will dwindle from its high levels and average around the $73-mark this year as a result of the slowdown in the US,” said Monica Malik, senior economist at investment bank EFG-Hermes.
Mary Nicola, economist at Standard Chartered, told Emirates Business: “GDP growth in the UAE is likely to slow down to 6.8 per cent for the year with the US growth forecast at 0.5 per cent. “Even though the oil price will remain higher than last year’s average of $83 per barrel for the first quarter of this year, it will fall to $70 for Q2, $73 for the third quarter and around $75 for the last quarter of this year.”
The World Bank estimated oil prices for last year at $71.20 a barrel.
“The broader issue here is the impact of a US slowdown on the UAE economy and at present we look well placed to ride out this phase in the US economic cycle,” Simon Williams, Chief Economist for Gulf Markets at HSBC Middle East, said.
“Although oil prices may soften, they are unlikely to fall to a level that
threatens the stability of public finances or the trade and current account surpluses. Investment plans will remain affordable and will continue to be executed,” Williams said. He said the outlook is still bullish for growth in the UAE, and in the Gulf as a whole.
Malik said: “The GDP forecast is unlikely to change much as a result of the slowdown in the US economy.”
Both Williams and Malik agreed that inflation continues to pose a challenge. “The latest interest rate cut just adds to the inflationary pressures in the country. There’s a lot of liquidity currently floating in the economy and that is likely to increase even further with interest rates at negative levels. With money supply growth so strong, interest rates need to be higher,” Malik said.
According to Malik, the UAE is likely to see a currency reform this year as US Fed continues to reduce rates.
“With the US continuing to cut interest rates, it makes the case for a currency reform in the Gulf even stronger. We estimate that there is a 60 per cent chance of a currency reform happening in the UAE in the first half of this year,” Malik said.
However, it is unlikely that the Gulf states have the appetite to de-peg the currency, said Nicola.
Price levels in the UAE remain under upward pressure as a result of the rate cuts, Williams said.
“Much of the inflationary pressures we are currently witnessing in the UAE comes from supply side constraints. Those are being progressively addressed, but the problem is that rate cuts will speed up already strong demand growth, ensuring that supply side gains are rapidly absorbed and that prices remain under upward pressure,” he said.
Both Williams and Malik said the Gulf was relatively well insulated from the slowdown in the US economy.
“The growth prospects still look bright. The UAE has a positive environment for sustaining growth. The GDP forecast is unlikely to change much as a result of the slowdown in the US economy. The forecast for average oil prices this year is still strong, despite a US slowdown,” Mailk said.
Oil prices are likely to cool off from recent record levels after the first quarter of this year, analysts have said. “Oil prices will average around the $78-mark for the year, which is much higher than the average price for last year,” Malik said.
Saudi Arabia’s deputy central bank governor said that Gulf states should maintain their currency pegs to the US dollar regardless of rampant inflation in the region that could be fuelled by the latest interest rate cuts.
“There must not be a decoupling between Gulf currencies and the US dollar,” Mohammed Al Jasser said at the World Economic Forum in Davos. David Rosenberg, chief economist for North America at Merrill Lynch, said the Federal Reserve needs to drop its target rate to one per cent to address housing deflation and the reluctance of banks to lend.
The central bank will reduce the rate for overnight loans between banks by half a percentage point to three per cent when policy makers meet next week, Rosenberg said in a note.
The US budget deficit may widen to at least $219bn (Dh803bn) this year, the most since 2006, as a sagging economy reduces tax revenue, according to the Congressional Budget Office.
The shortfall could be even greater if lawmakers approve a proposed $150bn economic stimulus plan.
Economic growth may slow down to 6.8% this year