Outlook 2021: UAE’s economic recovery in 2021

The economic consequences of the Covid-19 pandemic have been severe for all countries around the world. Even with unprecedented fiscal stimulus and monetary policy support, the IMF estimates that global growth contracted by -4.5 per cent in 2020, making it the worst recession since World War II. The only major economy that likely saw positive GDP growth last year is China, and even there the estimated growth of 1.9 per cent would be the slowest in more than 40 years.

The UAE, like other GCC countries, faced a double whammy of sharply lower than expected oil revenue in 2020 in addition to the impact of the coronavirus on the non-oil sectors. Wider budget deficits limited the scope for additional fiscal stimulus in most of the GCC, but official data shows that the UAE increased spending on wages, subsidies and investment last year, helping to mitigate some of the economic impact of the pandemic.

The UAE central bank also provided additional liquidity to the banking system, which in turn allowed banks to provide relief for borrowers affected by the pandemic.

Nevertheless, Emirates NBD estimates the UAE economy contracted by -6.9 per cent in 2020 as both oil and non-oil sector GDP declined in real terms. Oil production cuts were necessary as global lockdowns in the second quarter of 2020 led to a collapse in the global demand for oil. Transport, logistics, retail and hospitality sectors were among the most affected by the pandemic as borders were closed and the volume of global trade declined by an estimated 10 per cent last year, according to the IMF, the most since the global financial crisis in 2009.

International tourism was also severely impacted by border closures and other restrictions on movement in the second quarter of 2020 and the sector has been slow to recover. One silver lining for the UAE’s travel and tourism sector was the signing of the Abraham Accords normalising relations with Israel in September 2020, which opened up a new market. The growth in visitor numbers from Israel in the last month of 2020 helped to offset lower visitor numbers from some of the UAE’s more traditional source markets.

The loss of private sector jobs and uncertainty about the outlook has weighed on both consumption and investment in the private sector in the second half of last year, even as the UAE economy reopened from June.

The approval of several Covid-19 vaccines before the end of 2020 suggests that some of this uncertainty should be resolved in the coming months. While it will likely take several months for vaccines to be rolled out to all those who want it in the UAE and the rest of the world, global growth is expected to rebound from the second quarter of 2021.

For the UAE, the improvement in the global growth outlook together with a weaker US dollar, record low interest rates and firmer oil prices should support the domestic recovery. Expo 2020, which was postponed to October 2021, should help to boost tourism in the latter part of this year. Overall we expect the non-oil sectors to grow 3.5 per cent this year, although headline GDP growth will be slower at 1.9 per cent.

Khatija Haque is the chief economist and head of research at Emirates NBD