UAE Shows Economic Strength as Fed Signals Potential Rate Cuts

After the Fed interrupted its quick hike cycle in September 2023, the Fed Funds rate has been at its highest level since the year 2000 for around ten months.

When it meets at the end of this month, the US Federal Reserve will likely maintain its benchmark interest rate steady. However, officials’ recent remarks indicate that they may be getting ready to lower the Fed Funds rate in the following months due to declining inflation and a deteriorating labour market.

According to Emirates NBD’s house view, the market is pricing a 25 basis point rate decrease at the upcoming September Fed meeting, with at least one other 25 basis point rate reduction before the year ends.

After the Fed interrupted its quick hike cycle in September 2023, the Fed Funds rate has been at its highest level since the year 2000 for around ten months.

The US economy has shown to be remarkably resilient to the pace and magnitude of monetary policy tightening since 2022. Inflation has decreased to the target of 2 per cent without causing the economy to enter a recession, which was something that markets and analysts had anticipated over the previous year.

The economies of the GCC, and the UAE in particular, have likewise survived the effects of growing interest rates and have maintained robust non-oil development in the past year. The region’s average non-oil GDP growth in 2023 was 4.2%, which was lower than the 5.5% growth in 2022 but still greater than the years just before the COVID-19 pandemic.

The UAE saw the highest non-oil growth in the region last year, at 6.2% and although data from the purchasing managers’ index survey suggests that the pace has somewhat slowed so far this year, it is still very much in the expansion zone. Preliminary GDP data for Abu Dhabi supports this, indicating that non-oil growth slowed to 4.7% year over year in Q1 2024 from 10.4% year over year in Q4 2023 and 6.1% year over year in Q1 2023.

According to official figures, the UAE’s economy grew last year mostly due to private spending, though investment and public sector consumption also played a role. We believe that the UAE’s growing population and the creation of new households are at least partially responsible for the over 12% increase in real private sector consumption.

Emirates NBD anticipates that this year’s rise in private consumption will be more muted due to rising living expenses (especially for housing) and higher loan interest rates for consumers.

Rather, in 2024 and beyond, development in the non-oil economy will be more heavily influenced by investment, both public and private. The first half of 2024 has seen a rise in infrastructure investment, including both ongoing projects and those that are still in the planning or budgeting stages.

According to figures from MEED Projects, there were almost Dh315 billion ($86 billion) worth of private sector projects underway as of the end of June, up from Dh235 billion at the beginning of the year. The majority of these projects are in the building industry.

By the end of June, the value of public sector projects that were underway had increased by more than Dh70 billion over the first half of the year, reaching Dh334 billion. However, the construction industry is currently executing the public sector’s highest-value projects, followed by the oil and gas industry. Now, the planning stages of public sector projects are concentrated on transportation, electricity, and water.

Large-scale transportation initiatives in Abu Dhabi include the Kizad Port, the Etihad Rail network project, and the Abu Dhabi metro; in Dubai, important transportation initiatives include the construction of Al Maktoum International Airport and the metro blue line.

The development of the strategically important sewerage tunnel in Dubai is the largest project in the water sector. A number of transitional or clean energy projects are also planned for the United Arab Emirates, such as many solar parks, a range of green or low-carbon hydrogen plants, and four additional reactors under the Barakah One nuclear power plant development.

Finally, even though the value of worldwide FDI flows decreased last year, the UAE continued to be the region’s top beneficiary of inward foreign direct investment, with inward FDI growing 35% to roughly $31 billion, according to Unctad data.

As a result, Emirates NBD projects that the growth of the non-oil industry would somewhat decrease this year, to 5% from 6.2% last year.

Declining interest rates in the latter part of 2024 and early 2025 should, on the whole, encourage investment and consumption in the United Arab Emirates. However, due to the country’s sound fiscal standing, there will be less dependence on debt financing for projects in the public sector.

This investment is likely to occur even if interest rates don’t drop as much or as soon as markets presently anticipate, supporting economic activity in the UAE over the medium term, given the strategic nature of the planned public sector projects in particular.