UAE economy expands by 3.6% in 2023

The UAE’s economy grew 3.6% in 2023, exactly in line with our forecast, according to preliminary data. The non-oil sector grew by a faster than expected 6.2% last year, while the oil and gas sector contracted by -3.1%. Financial services was the fastest growing sector in 2023, expanding 14.3% y/y after 6.6% growth in 2022. This was followed by transport and logistics (11.5% y/y), construction and real estate services.

The UAE’s economy has been remarkably resilient to both a lacklustre external backdrop as well as significantly higher interest rates in 2023. We now expect only a modest easing in monetary policy from the Fed towards the end of this year, with a total of 50bp in rate cuts pencilled in between September and December. This is likely to weigh on private sector investment this year. However, we expect public sector investment – particularly in transport and other infrastructure – to remain robust in 2024 and beyond, as the government has announced several large long-term projects including the expansion of the Etihad Rail network and Al Maktoum Airport. This will continue to underpin non-oil GDP growth in our view, offsetting any moderation in private sector investment and household consumption.

Consequently, we have upgraded our non-oil growth forecast for the UAE this year to 5.0% from 4.5% previously, taking headline GDP growth to 3.7% from 3.3% previously. We assume no growth in the oil & gas sector this year as oil production is likely to remain constrained by OPEC+ production limits. If there is an increase in the UAE’s target production level, this would pose an upside risk to our headline GDP growth forecast.

Minutes from the end of April / early May FOMC meeting showed that several Fed officials were willing to “tighten policy further should risks to inflation materialise” while the Fed also wasn’t sure how well their policy stance was actually cooling the US economy. Inflation prints in the US have been stronger than expected so far in 2024 and the Fed noted that it would “take longer than previously anticipated” for inflation to get closer to target levels. Much of what was in the minutes had been revealed from Fed speakers since the meeting so the impact on markets was relatively muted.

Inflation in the UK dropped to 2.3% y/y in April, down from 3.2% a month earlier. Core inflation also slowed, falling to 3.9% from 4.2% in March. On a monthly basis, CPI inflation rose by 0.3%. The April inflation print was faster than markets had been expecting but nevertheless affirms the strong disinflationary trend at play in the UK economy. Higher costs for hotels and restaurants as well as transport prices were behind the stronger than expected price data last month. Markets had been pricing in a stronger chance that the Bank of England would begin to cut rates as early as June but following the inflation data have slashed those expectations to barely more than a 10% probability.

PMI measures for Japan showed some stabilization on aggregate for May according to the Jibun Bank PMI survey. The manufacturing index improved to 50.5 from 49.6 a month earlier while the services component cooled. Overall the composite index remained positive at 52.4, up marginally from 52.3 a month earlier.

Today’s Economic Data and Events

• 09:00 IN HSBC composite PMI May
• 11:15 FR HCOB composite PMI May: forecast 51.0
• 1:30 GE HCOB composite PMI May: forecast 51.0
• 12:00 EC HCOB composite PMI May: forecast 52.0
• 12:30 UK S&P Global composite PMI May: forecast 54.0
• 16:30 US initial jobless claims May 18: forecast 220k
• 17:45 US S&P Global composite PMI May: forecast 51.2
• 18:00 EC consumer confidence May: forecast -14.2

Fixed Income

• Treasury markets took the Fed minutes in their stride with limited reaction. Yields on the 2yr UST added 4bps to close at 4.869% while the 10yr settled near unchanged at 4.4218%. UK bonds sold off sharply, however, as the hotter than expected inflation print raised the risk of rates in the UK staying higher for longer.

FX

• Currency markets were broadly dollar positive overnight. EURUSD settled slightly lower at 1.0823 while USDJPY added 0.4% to 156.80. Sterling popped higher initially in response to the UK inflation data but then faded those moves to close at 1.2717, roughly unchanged on the day.
• Commodity currencies sold off overnight. USDCAD rose by 0.3% to 1.3695 while AUDUSD fell almost 0.7% to 0.6620.

Equities

• Equity markets in the US closed lower with the Dow Jones down 0.5%, the S&P off by 0.3% and the NASDAQ dropping 0.3%. European markets fared worse with the FTSE down by 0.6% and the Euro Stoxx sinking 0.4%.
• Asian markets have opened on a mixed footing today with the Nikkei down by 0.6% and the Hang Seng falling by nearly 1.5%.

Commodities

• Oil markets closed lower overnight, weighed down by the hawkish message coming from the Fed minutes while inventories also rose. Brent futures closed lower by 1.2% to USD 81.90/b while WTI fell by more than 2% to USD 77.57/b.
• EIA data showed a build in US crude stocks of 1.8m bbl last week, offset by modest draws in gasoline. Overall petroleum stocks were higher last week thanks to builds across the rest of the barrel. US oil production was unchanged at 13.1m b/d while product supplied was flat at 20.03m b/d