With the introduction of a 5% value added tax (VAT) in January 2018, analysts believe consumers will rush to make any large purchases at the tail end of 2017. This increased spending in 2017 will likely cause a slump in early 2018 as spending slows in the immediate aftermath of the VAT introduction.
But non-oil sector growth and government spending on the Expo 2020 preparations will ensure the VAT introduction will not have a lasting effect on the UAE’s economy. Non-oil sector growth is set to increase from 1.9% in 2017, to 2.8% in 2018. This, coupled with a 19.5% increase in government spending on infrastructure projects, will provide the driving force behind the UAE’s economic growth in 2018.
The Long-term Outlook Also Looks Bright
After next year, non-oil sector growth is projected to increase into 2019 and 2020. IMF mission chief to the UAE, Natalia Tamirisa, estimated that the country’s non-oil sector would experience growth of between 3.3% and 3.5% in 2020. She said, “we see a gradual recovery from the UAE over the next few years on the back of firming oil prices, a pickup in global trade, investment for Expo 2020 and easing fiscal consolidation.”
The increased infrastructure investment in 2018 will be offset by rising oil prices. The IMF predicts oil prices will average more than US$62 a barrel in 2018, a marked increase from the 2017 average of around US$54 a barrel. Oil exports account for around 25% of the UAE’s GDP. The increased price of oil will significantly strengthen UAE finances. Tamirisa added, “oil prices still play an important role in the economy so it’s normal that they’re still working their way through the market”.
The Property Market Will Also Gain Strength In The Coming Years
The UAE has put the property crash of 2008 behind it. The banks are far stronger and more resilient to price fluctuations now than they were. The government has also excluded property from the new VAT measures. This will help strengthen the real estate market over the coming years.
All of these factors will come together to reduce the UAE’s consolidated fiscal deficit. The figure will fall from 2.2% in 2017, to 1.3% in 2018, and will eventually disappear altogether after in the years following 2018.
Any dip in the UAE economy created by reduced consumer spending will be temporary. Strong economic growth in non-oil sectors, along with the increasing global price of oil and the strengthening of the banking sector, will more than offset the increased government spending in 2018. The economic outlook for 2018 and beyond is bright for the prosperous Arab nation.