Dubai, June 30: economy may have bottomed out, but any recovery will probably be slow in coming. That’s the sobering message from investment bank Morgan Stanley, which announced its latest economic forecast for the UAE on Monday. In a research report, the bank revised downward its growth estimate for the fifth largest oil-exporting country.
It now expects the UAE’s gross domestic product to shrink by 1.9 per cent this year and then show a ‘mild recovery’ of 2.9 per cent in 2010. In its previous forecast last November, the bank had predicted positive GDP growth in both years – 2.8 per cent in 2009 and 4.9 per cent in 2010.
Mohamed Jaber, Morgan Stanley’s lead economist and the report’s author, attributed his more negative outlook partly to a significant cut in oil exports as a result of reduced output from Opec member nations. Other key factors in the downward revision were a decline in domestic consumer spending, continued weakness in the construction industry and weak foreign demand.
‘We had previously underestimated the magnitude of the downturn in both global and domestic demand and the degree to which both seem to have impacted the UAE economy,’ Jaber said.With its revised growth estimates, Morgan Stanley has joined a growing list of institutions that expect the UAE economy to shrink this year.The International Monetary Fund has forecast the economy to shrink by 0.6 per cent in 2009, while another investment bank, EFG-Hermes, has estimated an annual decline of 1.7 per cent. Swiss bank Credit Suisse expects the economy to Contract by 2.5 per cent.
However, Jaber argues that signs of improvement in the global economy together with high oil prices and a pause in the erosion of domestic Asset values are helping the economy to form a bottom. ‘We believe that the economic environment may have begun to stabilise and that we may indeed see positive growth in 2010,’ he said.He cautioned that the strength of the recovery will depend on the Momentum of global growth and a resolution of imbalances in the real estate and over-extended banking sectors. The Governor of the UAE’s Central Bank said on Sunday that the government is considering a law that would extend federal guarantees to bonds issued by individual banks, making it easier and cheaper for local lenders to raise funds on international markets.
Despite emergent signs of a stable real estate market in Dubai, analysts polled by Reuters said they expect a further price correction of about 20 per cent during the lean summer months. Deutsche Bank said earlier this month that it too expects real estate prices to fall further by 20 per cent.Rents are expected to slide during the coming months as expatriates return home and housing held for speculative purposes may become available for rent, Jaber said. He expects the UAE population to decline this year by 3.8 per cent. ‘It is not unusual for a country with a large expatriate workforce to witness a decline in population during downturns.’
By way of comparison, Jaber said that during recessions in 1998 and 2001, the non-resident population of Singapore decreased by 2.4 per cent and 8 per cent, respectively.
A fall in housing costs would swing the consumer price Index into deflation territory. Jaber estimates a deflation of 6.4 per cent in 2009 and 1.2 per cent in 2010. He estimates that housing costs, or rents, will decline this year by 15 per cent.’Rent increases were responsible for Close to 60 per cent of overall Inflation during 2005-08,’ he said.
‘This will surely come as a welcome relief to consumers.’
—Agencies