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29 March 2024

UAE inflation to ease to 7.1% this year from 12.2%

All major industrial economies are to contract this year. (ASHRAF AL AMRA) 

Published
By Mohamad Al Kady

The UAE's GDP growth will nearly double to 5.3 per cent in 2010 from 2.7 per cent this year, says a new research report. Citigroup said in a report the economy may grow at 6.7 per cent in 2008.

The report expects inflation will drop by nearly five per cent to 7.1 per cent in 2009 compared to 12.2 per cent in 2008.

It forecast that the consumer price index would rise by 1.2 per cent to 8.3 per cent next year.

The bank estimated the Middle East and Africa region would be able to achieve GDP growth rate of three per cent in 2009, with Qatar leading by 9.3 per cent, while Saudi Arabia's GDP will grow by 2.2 per cent and Kuwait's at 1.4 per cent.

Citi's forecast for the global economy showed that Asia will continue to lead emerging GDP growth by 4.7 per cent this year, followed by Middle East and Africa at three per cent, Latin America at 1.2 per cent and Central and East Europe at negative growth of 0.1 per cent.

The outlook for the global economy continues to deteriorate as the global GDP is expected to record a negative growth of 0.7 per cent in 2009 before recovering by 2.5 per cent in 2010.

It showed a combination of declining wealth, notably higher uncertainty, and financial disruptions appeared to have led to sharp declines in demand around the world.

Accordingly, Citi has lowered forecasts for year-on-year GDP growth for 2009 in most countries. The biggest changes have come in those countries that are particularly exposed to international trade.

"We now expect all major industrial economies to contract substantially this year, and we expect only sputtering recoveries until 2010. For emerging economies, 2009 is likely to be the worst year of growth performance since the crisis of 1998. For the global economy as a whole, this is likely to be the worst year for growth in almost 60 years," a recent report by the bank said.

However, the report cited some improvement in the global financial conditions since mid-December last year. "Credit markets have improved, and equity prices have not retested their December lows.

"This probably reflects, in part, the strong commitment of key central banks, most notably the Federal Reserve, to pursue unconventional policies. With the economic outlook deteriorating rapidly, banks and other financial institutions remain under severe pressure."

It expected governments were confronting fundamental choices about how to manage their direct interventions in financial institutions in the face of competing objectives and constraints.

The British Government has had to expand and redirect its support for British banks. Members of the incoming Obama administration have indicated that they expect to lay out a detailed plan for shoring up the financial system so it can support, as opposed to hinder, an economic recovery.

Citigroup also predicted global central banks would take further measures to ease the tightness in liquidity and reduce interest rates.

It showed central banks in more than half of the G20 have lowered short-term interest rates since the beginning of the year.

"We expect both the European Central Bank and the Bank of England to lower their targets for short-term rates to 50 basis points in the near future. This will bring them to the cusp of 'unconventional' policies. We expect all major emerging economies to be lowering rates by about one- to one-and-a-half percentage points, on average, by midyear."

The report expected the financial policy would continue to present new challenges for governments around the world. "It is hard to see how the global economy can recover unless the basic functioning of the core of the financial system, including its capacity to generate new loans, improves. In this context, the success or failure of these initiatives by the US and UK governments are likely to have a significant impact on how the global economy evolves."

Citigroup highlighted the collapse in international trade as the main driver for the deteriorating situation in the global economy.


Forex market to be volatile

Citigroup is expecting the euro to weaken further against the dollar. "We expect the euro to weaken further, moving back to what we judge is its long-term fair value, at around 1.15-1.20 versus the US dollar."

"We suspect the outlook for euro-area growth currently endorsed both by the market and by ECB is still not gloomy enough. Future negative surprises will likely force the ECB to cut rates more than it is currently expected by the market, helping to weaken the euro."

However, the report predicted the pound would rise a little against the euro, or rather the euro would fall faster than the pound against the dollar, after having weakened sharply in recent months in response to UK economic weakness and worries over the UK authorities' commitment to economic stability.

It also expected the Japanese yen to remain strong against other currencies, as uncertainty surrounding the global economic outlook and volatile financial markets persist. "However, the yen's appreciation against the dollar will be modest, given the sharp deterioration in the Japanese economy and some stabilisation in the US economy and financial markets in the second half of 2009."

Meanwhile, the yen may appreciate against the euro very sharply as the ECB is expected to cut policy rates in the face of a worse-than-expected economic outlook.