Economic Indicators Influencing the UAE Economy - Essay Example

Economic indicators influencing the UAE economy Student’s name Professor’s name Course title Date Introduction The UAE comprises of seven Emirates involving Dubai, Abu Dhabi, Ajman, Sharjah, Ras Al Khaimah, Quwain, Umm Al, and Fujeirah. UAE has specialized in oil production in the world and thus has benefited from the price of oil in the world. However, the economy of UAE does not rely only on oil but has a diversified economy. The vision of UAE is to become an international trading hub and regional financial center. Therefore, data of recent years indicate the economy of UAE has been booming. The productivity of high capital has filtered to high GDP and growth rates that are sustainable over the past decade. The economic indicators merely substantiate the prosperity and success of the current economy of UAE (UAE Central Bank, 2015). Thus, the paper focuses on assessing the economy of UAE by use of the economic indicator. Also, the paper will evaluate the change in Monetary Policy and Fiscal Policy and their impact on the performance of the economy. These economic indicators covered are inflation, GDP, unemployment rate but there others like interest rate, the balance of payment, Purchase Manager’s Index and fiscal balance (Terterov et.al., 2006) . Result and discussion The economic indicators to be discussed in this paper that influence the economy of UAE is GDP, inflation and unemployment. Starting with GDP, it is the most significant indicator of the overall economic growth of the nation. It replicates the monetary value of all services and commodities that are produced in the nation over a fixed period. Therefore, it is a key indicator to assess the economy of a country. Thus, from the GDP data from a trading economy, the economy of UAE was affected adversely by the recession of 2009. It experienced GDP drop of 5.2% due to the reduction in construction and manufacturing industry. However, from that moment, UAE has continuously shown economic growth. For instance in 2010, economic growth was 1.6% that increased to 5.2 % in the year 2011. During this period, most of the nations had a negative GDP apart from Russia, BRIC Nations Brazil and China. As from the above figure, UAE has maintained gradual growth. Thus, the increase of 2013 is approximated to be 5%. However, in 2015, the price of oil fell at the rate of 75% which influenced the GDP negatively. Hence 2015 registered GDP of 3.6 in December 2015 as indicated by IMP data. The GDP have been decreasing before 2010 because UAE and other countries focused on the expansion of production of oil. Between 2010 and 2013, the UAE depended on gas and oil industries (World Bank, 2008). Nevertheless, in 2013 UAE started to diversify its economy and expanded to non-oil and gas sectors like construction, manufacturing, retail, tourism and wholesale. Therefore, GDP and other indicators have reflected these activities as from 2013. Some vibrant economic indicators like Manager’s Index and UAE purchasing power indicated that economic growth of non-hydrocarbons was very productive in 2014. Also, PMI analysis showed that activities of non-hydrocarbon supported domestic and hydrocarbon demand in international market. This reflects economic growth as the result of engaging in diversified investment in UAE. Therefore, it is focused that UAE will show positive growth in the preceding years due to diversification. The GDP decline as a result of a reduction in oil prices will be balanced by growth in non-oil sectors. However, these forecasts depend on the UAE Leadership and long term vision. The table below illustrate the general economy of UAE from 2011 Source: (Focuseconomics, 2016) The economic indicators have indicated the growth of UAE economy as from 2011 to 2014. It was observed in 2014 that most of the significant emerging market worldwide faced a minimal slow down, and economic growth shifted to the advanced economies. Although there is a marked difference policy embraced by advanced economies and the USA, the advanced economies continued to grow. However, there is minor inflation indication, despite the economic growth that required primary central banks to adjust their policies consistently to accommodate the inflation (International Monetary Fund, 2010). UAE indicated resilient and positive economic growth in 2014 despite the decrease in global economic growth. The increase resulted from the measure that was taken by UAE to diversify its economy into gas businesses and non-oil businesses. The fall in gas and oil have not significantly affected UAE since it has begun to be independent by focusing on construction, manufacturing and other independent activities of oil. In 2012, communication department accounted for 23%, manufacturing for 42%, restaurants for 15.5% and retail/wholesale for 16.5% while agriculture and construction contracted. Besides, diversified economy and strong infrastructure have assisted UAE to maintain its rank as one of the best in the Middle East Unemployment The employment rate is also the significant indicator in evaluating the economy of a nation. The stock market and financial movement depend mostly on the employment rate and thus are important to reflect the employment rate of a given country. Besides, the rate of unemployment influence other indicators of the economy like consumer sentiments and confidence. Economic activity depends heavily on the purchasing power of the consumer. For instance, lower corporate profits are obtained from the weak labor market. This is because unemployed people have the low purchasing power that results from corporate losses. Therefore, the activities of the consumer affect directly corporate profits that result to the stock price increase (Griffis, 2013). From the figure below, the population rate has been rising since 1970 up to 2010 when it remained relatively constant. Similarly, the rate of unemployment in UAE has been increasing since 1990 to 2010 when it started to decrease due to the decrease in population rate and diversification of the economy. In the year 2011, the level of unemployment in UAE was 4.60% that reduced to 4.20% in the year 2012. This information on the rate of unemployment was obtained from UAE central bank. Similarly, the rate decreased further to 3.8% in the year 2013(UAE Central, 2013). Source: Quandl database 2015 Therefore, the rate of unemployment in UAE national is about 20%. The government has focused on National Employment Education to enhance the rate of employment that will influence the economy positively. For example, Oman and Saudi Arabia improved their economy due to a decrease in the rate of unemployment of the nationals, which can be emulated to improve the overall employment rate in UAE (Griffis, 2013). Inflation. Inflation is an overall rise in price levels and decline representation of purchasing power. It is expressed as an increase in percentage over a given period. Thus, a rise in inflation results in a decrease in purchasing power. The inflation rate is used to establish financial policies thus it is an important indicator for the advisor and economic expert to employ in determining financial policies of future for the nation (Elhage, 2004). Various indicators are employed in measuring inflation. For example, there is Price Index, which is the average of price change over a period of time of a given amount of goods. Source; Quandl database, 2015 In 2009 inflation in UAE was negative because of subsequent fall in the price of the service sector and real estate. In 2015 inflation was about 2.5%, 2.3% in 2014, 1.1% in 2013, 0.7%in 2012 and 0.9% in 2010. The rate of inflation started to increase in the year 2014 that continued to increase until 2015 (UAE Central, 2014). In 2016, there is a decrease in inflation as determined by CPI. The increase was due to rise in rent that show around 33% increase of the CPI basket. Non-tradable inflation may have contributed to rising in inflation by 3.2%. However, a high value of Dirham contrary to the currencies of the partner in trade reduced inflation to a constant value of 1%. Consequently, the inflation rate reduced from the year 2015 due to declining in rents and food as indicated by CPI. The decrease was also contributed by the increase in a value of Dirham and reduction in the price of non-tradable commodities. Besides, the influx of new apartment to rent arena resulted in a reduction in commercial and residential rent. Therefore, their government should take necessary measures to minimize increase price estates and rent. Dubai has policies in reducing rent that has reduced their inflation significantly. The other six have not enhanced the part of the rent. The increase in rent have raised the inflation in the past, and thus the government should intervene to stabilize rent. Similarly, the government should regulate the price of some basic food. Thus, the reduction in inflation will result to a healthy economy. It is expected that in 2017 inflation will be around 4%. Monetary policy and fiscal policy in UAE Monetary policy From above data, it clear that the UAE government employs monetary policy of active expansionary that is focused on growing the economy and developing the suitable goals of low unemployment, stable prices and sustained economic growth. The data indicates that currently, GDP rate is increasing due to diversification approach used by UAE. It has expanded its economy to include gas businesses and non-oil companies. The outcome from this activities maintains the GDP even when the oil prices reduces (IMF, 2015). Thus, the government has increased the government spending to diversify the economy. The strategy is in lock-step with the fiscal policy of the government to achieve the economic goals. The implication of monetary policy to the economic performance. The monetary policy influences the performance of the economy in three ways. First, it has led to a sustained economy. By diversifying the economy, the government obtains money from the non-oil activities where it uses the return to capitalizes various sectors like education that sustain the economy by increasing the rate of GDP. Also, the policy has resulted to low unemployment. The diversity economy creates more job vacancies for the UAE individuals thus leading to low unemployment and high GDP, which influence the economy positively. Lastly, the monetary policy has resulted in stable prices. Although the increase in the supply of money result to increase in overall prices, the government is making measures to ensure that there is price stability of the commodity by setting regulations that control price (Oxford Business Group, 2008). . Mostly, monetary policy is perceived as the main contributor to high inflation. Apart from monetary policy, many other factors contribute to inflation whether contractionary or expansionary. If there is no inflation signifies low living standard and no increasing wage (Al, 2001). Fiscal policy. Fiscal policy is the decision of the government regarding taxing and spending. The growth in the economy is stimulated by an increase in government expenditures on goods and services. This, will, in turn, increase the demand for services and goods. High demand will result in high production thus improve the employment rate. Therefore, from the obtained data, it indicates that government spending is high on goods and services. For instance, the rate of employment as the increased from the year 2010. For example, 2011 the rate of unemployment was 4.6 %, but it reduced to 4.2% in 2012 (UAE Central Bank, 2012). Implication of fiscal policy to the economic performance The fiscal policy in UAE has increased employment. The increase in production requires more labor that results to high employment rate. Also, it has led to strong economic growth. When people are employed will have high purchasing power and thus speed up economic growth. However, a decrease in government spending will reduce overall demand in the economy. The production of business will slow, which will reduce profit and thus less business investment and hiring. Besides, a cut in government spending may hurt business Barry since their people will have less money to spend (IMF, 2015). Forecast of UAE economy The economy of UAE forecast to grow sustainably in the following years with its approach of diversifying economy under real leadership. GDP oil is predicted to increase as from 2017 although it will slightly shrink on 2016. Also, the OIL Glut linked with the Oil of Iraq entering the market is predicted to reduce the oil price to $40 per barrel. According to IMF, the economic growth of UAE forecast to reduce by 2.6% in 2016 and expect that the fiscal of UAE will widen in 2016. In 2016 budget, public spending has been cut. However, in 2017, the economy is poised for more activities and but will grow after 2017 at about 4%. In the next three years, inflation is forecast to remain around 4%. The oil exporting countries have maintained moderate inflation because of reduction in imported goods and food price and services due increase in the value of the dollar. The inflation in UAE explained by an increase in the price of non-tradable inflation and housing that have pushed inflation consistently beyond 3%. However, unemployment in the next three years is not expected to increase beyond 5%. UAE perceive unemployment as a grave issue among its citizen and is developing various Emiratization programs in the private and government sectors. Besides, the government has discovered that it is only Human Capital development that can enhance sustainable development. The non-oil sector businesses are also forecasted to create more opportunities for employment in the next five years. Summary and conclusion. The economy condition of UAE been improving since the year 20l0. High employment rate and high GDP have been the major contributor to the stable economy in UAE. For instance, high GDP was obtained in the year 2010 and has maintained due to a diversification of the economy to involve non-oil businesses. Also, the rate of non-employment has also reduced from 2010 since the government increased spending. Conversely, inflation has been growing since 2012 because of increase in rent and price of the fundamental right. The economy is predicted to grow by 2 to 4% in next three years. In 2015, the growth is mainly attributed to the increase of the non-oil sector and continued diversification that are expected to raise by 3.7%. The 2015 average PMI WAS 53.9 which is lower as compared to 2014 PMI, which was 59.3. This signifies a decrease in UAE’s economy in the fourth quarter of 2015 (UAE Central Bank, 2015). Thus, economic of UAE in the short term will rely on the geopolitical development and situation of oil price. There is also a negligible risk from war crisis and regional political in UAE resulting from conflict in Libya, Iraq, Yemen and Syria which are discouraging the investors. References Al, A. I. (2001). United Arab Emirates: A new perspective. London: Trident Press. Elhage, M. 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