The UAE economy will grow at 0.5 per cent this year, while inflation is set to drop to 2.5 per cent, Standard Chartered said in its report "UAE - Braving the storm."
In a four-page report, the London based bank said that while key sectors of this oil and gas based economy will slowdown in 2009, fiscal spending will increase.
In another significant update the bank said inflation levels in the country will climb down to 2.5 per cent in 2009 from 12 per cent in 2008. The bank identified deteriorating labour markets and tight liquidity conditions as the biggest challenges.
The UAE economy is expected to assume an upward trend in the second half of this year, while the first half is expected to be difficult, the economists said. Standard Chartered termed UAE's labour market as its "biggest risk". With the majority of the labour force made up of foreign nationals, rising job losses could lead to a reversal in population flows, it said.
"Foreign nationals who lose jobs have to leave the country within a short period of time. How these demographic factors play out will have serious consequences for the economy," it said.
It identified four reasons for its forecasts: Slide in oil prices, a recession in global economy, lack of funding for construction and real estate and sliding tourism.
Standard Chartered affirmed that UAE's impressive budget may help cushion the impact of the crisis and summed up its finding as: "Following years of impressive growth, the UAE economy is cooling off. Budget and current account surpluses will allow the government to increase fiscal spending to combat the slowdown. The UAE has announced its largest budget in history for 2009 – Dh42.2bn, a 21 per cent increase from 2008. The government expects a balanced budget this year, following surpluses exceeding 10 per cent of GDP from 2004-2008."
Standard Chartered identified a decline in exports, drop in number of tourists and a reluctance among shoppers to spend as the three factors having a negative impact on the UAE.
It appreciated Dubai's response to the crisis "Dubai's Government announced a 42 per cent increase in spending for 2009 and is forecasting a budget deficit.
"We believe this is the right policy response." (With inputs from agencies)