UAE: 2022 growth forecast revised higher

The UAE economy has grown faster than we had anticipated at the start of the year, both in the oil and non-oil sectors.  Official data put Q1 GDP growth for the UAE at 8.4% y/y, with the non-oil sectors expanding 8.8% y/y off a low Q1 2021 base. While we expect the pace of growth has moderated over the course of the year, particularly in H2, we have revised up our forecast for 2022 real GDP growth to 7.0% from 5.7% previously. The deteriorating global economic backdrop, higher interest rates and a stronger USD has led us to revise our 2023 GDP growth forecast down to 3.9% from 5.7% previously.

UAE GDP growth by sector

Source: Haver Analytics, Emirates NBD Research

Much of the 2022 GDP upgrade is due to higher forecasts for oil and gas sector growth this year.  The UAE’s crude oil output has increased by 13% in the first eight months of this year, relative to full year 2021 output.  In addition, the UAE has announced that it will accelerate plans to boost oil production capacity, with a view to reaching 5mn b/d capacity by end 2025 rather than the previous target date of 2030.  This indicates greater investment in oil and gas infrastructure, which will underpin growth in the sector over the medium term, even if current production is curtailed by OPEC+ in the coming months.  We now expect hydrocarbons GDP to grow by 13% in 2022 (10% previously) but have cut our forecast for 2023 hydrocarbons GDP to 5% from 10% previously. 

UAE crude oil production has surged this year

Source: Bloomberg, Emirates NBD Research

PMI and other data points to robust growth in the UAE’s non-oil sectors through Q3 2022.  Indeed, the S&P Global Purchasing Managers’ Index rose to the highest level in more than two-and-a-half years in August, as businesses have consistently reported strong growth in activity and new work in recent months.  Retail businesses have reported double digit growth in consumer spending in H1 2022 and hotels have been in a position to increase their revenues per available room by almost 20% on 2019 levels while increasing occupancy as well. The real estate market has also recovered from its pre-pandemic lows, with strong growth in both the number and value of transactions in H1 2022, in large part due to foreign investment.   We have consequently revised up our forecast for non-oil sector GDP to 4.7% in 2022 from 4.1%, taking into account some expected slowing in momentum in the final quarter of this year.

UAE PMI and key components

Source: S&P Global, Emirates NBD Research

The outlook for 2023 is more uncertain as the global economic backdrop deteriorates seemingly on a weekly basis. Central banks have become more aggressive in tightening monetary policy to curb inflation even as downside risks to growth increase, and markets are now pricing developed market interest rates moving higher and staying there for longer than they were just a few weeks ago.  The UAE is an open economy – the value of external goods trade reached 137% of GDP in 2021 - and thus not immune from slowing global economic (and trade) growth. With a pegged currency, competitiveness is eroded as the USD strengthens and higher borrowing costs are likely to weigh on both consumption and private sector investment next year.

However, the UAE is in the enviable position of running a fiscal surplus - which we expect will remain the case in 2023 – with a strong balance sheet. This should allow the public sector to continue to invest domestically in order to achieve its longer-term strategic goals even as the private sector faces headwinds. Nevertheless, we do expect non-oil sector growth in the UAE will slow in 2023 to 3.5% (from 4.0% previously).