UAE to remain Gulf's fastest-growing economy despite soft start to 2024

The UAE's economy has outpaced its Gulf neighbors over the past year, driven by a robust non-oil sector. Recent data from Capital Economics, an economic research company, shows that the nation is on track to maintain its position as the fastest-growing economy in the region.

Earlier this year, the Central Bank of the UAE forecasted robust economic growth of 4.2% for 2024, with an even higher growth rate of 5.2% expected for 2025, primarily driven by the non-oil sector. In a similar vein, the IMF revised its May projection for 2024 GDP growth to around 4%, up from the 3.5% forecast it had released in April.

GDP figures for Abu Dhabi and Dubai, the UAE’s largest emirates, revealed a softer start to the year, according to the report from Capital Economics. Abu Dhabi’s economic growth decelerated to 3.3% year-on-year in Q1 2024, down from 4.1% in Q4 2023, while Dubai’s growth edged down to 3.2% from the previous 3.5%.

Given the size and influence of these two emirates, it’s likely that the UAE’s national growth rate has also slowed in Q1.

"For Abu Dhabi, the UAE’s oil hub, the Q1 GDP data showed that growth in both the oil and non-oil sectors slowed," the report said. "In Q2, oil production volumes appear to have been broadly flat compared to Q1 and, in year-on-year terms, growth picked up from -4.2% y/y in Q1 to -1.0% y/y. This would mark the fastest pace of oil output growth since Q1 2023."

The UAE’s oil sector is poised for a further boost, with OPEC+ agreeing to maintain output levels until October and the UAE securing a favorable increase in its base production quota starting January 2025. While the recent drop in oil prices could delay planned output increases, the oil sector is expected to significantly contribute to the UAE’s GDP growth in the coming quarters, based on the report.

In addition, Dubai’s tourism sector witnessed an "all-time high number of visitors over the first half of this year. Similarly, Dubai’s residential real estate sector has continued to boom. Prices rose on average by 20.7% y/y in Q2, up from 20.1% y/y in Q1, and the general price index is now well above the peak hit in 2014," wrote Capital Economics.

However, July’s PMI surveys indicate a softer outlook for the start of Q3. The UAE’s headline PMI fell to 53.7, its lowest level in nearly three years, reflecting weakened domestic demand. Similarly, Dubai’s Whole Economy Tracker for July recorded its weakest performance since January 2022, with slowdowns in tourism and retail trade offsetting gains in construction activity.

Despite these challenges, external demand remains a bright spot. Although new export orders slightly declined in July, they remain near their highest level in five years, and growth in the UAE’s non-oil exports and re-exports is expected to strengthen, according to Capital Economics.

Looking ahead, while domestic demand in the non-oil private sector may cool slightly, strong tourism and foreign trade should provide a buffer. The UAE’s budget surplus, steady at 4.5% of GDP in Q1, offers a cushion for supportive fiscal policy.

Additionally, anticipated monetary easing in line with the U.S. Federal Reserve could boost bank lending and consumer spending.
Overall, the UAE’s economy is projected to grow by 3.3% in 2024, making it the fastest-growing economy in the Gulf.

With a likely increase in oil output next year, GDP growth is expected to accelerate to 5.5% in 2025, reinforcing the UAE’s position as the region’s economic leader.