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Dubai economy set to grow by 3.5% in 2018

Diversification and the high degree of openness in Dubai along with the positive impact of global trends will boost economic growth in the emirate in 2018 and beyond by 3.5%, according to the Dubai Economic Outlook report released on the sidelines of the UAE Economic Outlook forum, which concluded today in Abu Dhabi. The report said that Dubai is also drawing on the continued recovery in global trade and the highest growth rates in most developed economies. 

The report reviewed the major macro and sectoral levels developments in Dubai in 2016 and 2017, and points to the prospects for 2018 in the context of foreign direct investment, Expo 2020 and other transformational initiatives aimed at the sustainable development of the emirate in the medium term as well as regional and global trends. Macroeconomic factors such as GDP per capita, fiscal and monetary policy and developments in the wholesale, retail, banking, transport and storage, real estate and construction, manufacturing and hospitality sectors are captured in the report. 

In terms of openness, Dubai ranked third in the world after Luxembourg and Hong Kong, with a high degree of dependence on foreign trade for income. Dubai's openness ratio was 321% in 2016, meaning that trade flows were more than three times higher than the net value added in the economy. The total value of Dubai's trade in non-oil goods was AED1.28 trillion in 2016, but its trade balance has been characterised by a permanent deficit as Dubai is a global hub for global and regional trade. Dubai’s imports are much more than its total exports as most imports are transported to other emirates and to neighbouring countries without them being registered as re-exports. Dubai's unique geographic location as a link between Asia and Europe, as well as its excellent cargo and air transport links and free zones, make it an attractive location for international companies to participate in Global Value Chains, GVCs. 

The extent of a country's involvement in GVCs determines its attractiveness and ability to attract foreign direct investment, which plays a key role in promoting the country's economic growth and development. 

Total FDI into Dubai stood at AED270.8 billion between 2011 and 2015 and in 2016, the emirate ranked seventh among the world leading cities attracting AED25.5 billion in FDI. As an open economy, Dubai is affected by global trends, but FDI receipts are expected to recover in 2017-2018. 

The Dubai Industrial Strategy unveiled in 2016 to boost its industrial output and thus participate in GVCs require FDI in high-tech manufacturing industries. Industrial FDI into Dubai grew relatively slowly compared to other sectors and accounted for 4.2% of total investment in 2015. The wholesale and retail trade sector was the largest sector attracting FDI, accounting for 38.2% of the total in 2015, followed by the finance and insurance sector 22.1%, and the real estate sector 21.7%. 

Dubai's real GDP grew to AED376.8 billion in 2016, up 2.9% from 2015. The Government of Dubai has in recent years adopted a fiscal policy to rationalise public spending by reducing budget deficit as a percentage of GDP from 2% in 2010 to 0.4% by 2013. Dubai has since maintained balanced accounts in 2015 and 2016 following which the government adopted an expansionary fiscal policy to stimulate the economy. The emirate’s success in reducing the budget deficit helped stabilise macroeconomic factors and resume growth in various sectors, especially banks, financial markets, trade, tourism and real estate. 

One of the factors that boosted Dubai's ability to balance its budget was a drop in public investment spending as many major projects were completed. The ratio of investment to total public spending has dropped from a peak of 36% in 2010 to about 17% in 2016, passing a low ratio of 11% in 2014. Government revenues, totalling AED46.1 billion in 2016, came from tax revenues (customs duty and taxes on banks), fees and fines, oil revenues and investment returns. 

Inflation in Dubai fell from an annual rate of 3.7% in 2015 to 2.9% in 2016 after rising steadily from 1.3% in 2013, due to slower price inflation in the housing, water, electricity, fuel and health sectors. In contrast, other major spending groups such as restaurants, hotels, food, non-alcoholic beverages, education and entertainment saw higher inflation rates in 2016. Rising interest rates in 2017 coupled with a liquidity contraction suggest that inflationary pressures will remain moderate in 2018. 

Dubai's official statistics are divided into 19 independent sectors and seven of these accounted for 77.2% of Dubai's GDP of AED376.8 billion in 2016. The sectors include wholesale and retail trade, transport and storage, financial services and insurance, manufacturing, real estate activities, construction, accommodation and food services, ranked according to their respective GDP contribution. 

The wholesale and retail trade sector, which also includes the motor vehicles and motorcycles repair, is the largest sector in the economy of Dubai with an added value of AED103.4 billion and 27.5% of GDP in 2016. The sector is the most heavily employed sector in Dubai and accounted for 22.4% of the workforce in 2015. It played an important role in supporting consumer spending in the economy and hit backward and forward linkages sustain economic activities in other sectors such as transport, warehousing, food and accommodation. Real value added by the sector was 1.3%, less than the overall growth rate in 2016. 

Foreign investment has helped turn Dubai into a global shopping and tourism destination. Gross fixed capital formation in wholesale and retail trade was AED17.1 billion between 2013 and 2015 and total investment in the sector was AED76 billion between 2011 and 2015. A labour-intensive but relatively low wage sector, wholesale and retail ranked seventh in terms of productivity in Dubai. 

The manufacturing sector added AED35.7 billion in 2016 - 9.5% of GDP - and employed 250,854 workers in 2015. It is the fourth largest sector in terms of value added and employment in the economy. The value added per worker amounted to AED142,000 in 2015, tenth compared to other sectors. The related and smaller industrial sectors, such as mining, quarrying, electricity, steam and gas generation that have high levels of capital per worker, ranked first and second in terms of productivity, at AED1.42 million and AED910,000 respectively in 2015. The manufacturing sector saw a rebound in growth in 2016 with real output growing at 3.4%, higher than the real GDP growth rate of emirate in the same period. 

The Dubai Economic Outlook report identified a number of key factors influencing the future of growth in Dubai in the coming period. The most important of these are the hosting of Expo 2020, the implementation of the Dubai Industrial Strategy 2030 and the Dubai 2021 Plan. 

The expo is expected to create 270,000 new jobs and attract around 25 million visitors to Dubai. The construction, transportation and storage sectors will benefit from the additional infrastructure required to accommodate the visitors. Aggregate demand will be boosted by an additional AED15 billion expected to be spent on roads and transport for Expo 2020 in government projects. The Dubai budget for 2018 has allocated AED5 billion for 2018 and an equal amount for 2019 too. 

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