A closely watched indicator of Dubai’s economic health on Wednesday revealed the first contraction of its private sector economy since the recession of 2009, underlining the growing impact on the city-state of low oil prices and global economic jitters.
The Emirates NBD Dubai economy tracker fell below the “neutral” 50 mark in February after the “first contraction in non-oil private sector activity” since the index began in January 2010. Declines in activity were revealed across the construction, tourism and retail trades.
The data reflect underlying bearish sentiment in Dubai, where expenditure cuts and staff lay-offs are increasing as the slowdown in its oil-rich Gulf neighbours combines with economic weakness in China and elsewhere and a slump in tourism from Russia.“Uncertainty about global economic growth, volatility in financial markets and low oil prices have weighed on sentiment and activity, while tourism and retail trade has also been affected by a strong US dollar,” the index reported as the tracker slipped to 48.9.
The business hub of the United Arab Emirates is almost entirely diversified away from oil but its economic health still remains tied to others.
Property prices have been on the slide in Dubai for more than a year, falling by as much as a fifth from a 2014 peak that was fuelled by a surge in investment as regional tumult led buyers to seek out the city-state as an investment haven.
Dubai’s banks have reported a rise in the number of small and medium-sized businesses whose owners have fled the country after facing problems repaying loans. The criminalisation of default encourages people to leave the UAE rather than risk prison for failing to repay loans.
Reports of large-scale job losses have spread in sectors from oil services to construction, both affected directly by low crude prices and the resultant slowdown in government spending.
Other sectors have also shown signs of stress, including retail, where volumes have declined by up to 30 per cent. The financial services sector has also been hit, with international and local banks trimming staff numbers as a liquidity crunch bites because of lower oil prices.
While some fear the economic deceleration could quicken, Dubai’s economy is supported by strong aviation and trade sectors. There are also hopes that a lifting of sanctions following last year’s nuclear deal could lead to a revival in trade with Iran.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said: “While I expect a further slowdown this year, I do not expect a contraction for the year. She forecast full-year growth for the UAE as a whole of 2.5 per cent.
UAE officials have talked up Dubai’s diversified, service-oriented economy, saying it can weather the oil downturn and rebound quickly. But Sultan al-Mansoori, the economy minister, last month conceded that his target of 3 per cent annual growth would be “challenging” given depressed crude prices.
The Dubai government remains burdened by loans and bonds of about $120bn.
While only limited amounts of the debt have been repaid since the last crisis, the government can sustain repayments while its economy is strong. But any serious economic slowdown would lead to questions over the emirate’s creditworthiness, even though Abu Dhabi, the UAE capital, has shown its willingness to support Dubai.
The 2009 recession in Dubai followed a bursting of the real estate bubble and a cash crunch that forced its government to turn to Abu Dhabi for bailout loans that prevented a sovereign default.