The outlook contrasts sharply with the 7.4 per cent growth that the UAE achieved in 2008 period. EFG Hermes had originally forecast in January that the UAE economy would contract by only 0.04 per cent.
As global economic conditions worsen, droves of expatriates, who make up about 80 per cent of the UAE’s population, are being sent home as companies downsize or close shop altogether.
EFG-Hermes, the largest investment bank based in the Middle East, said it estimates the country’s population to fall by 5.5 per cent this year, led by a 17 per cent drop in the population of Dubai alone. The bank predicts that the UAE’s population will shrink to 1.49 million this year from 1.79 million in 2008. It said there will be a sharp 30 per cent contraction in the number of employees in the construction, real estate and financial services sectors.
“This sharp fall in population will have a marked impact on private consumption, along with the greater economic uncertainty, correction in the property sector and lower tourism numbers,” said Monica Malik, economist at EFG-Hermes in Dubai.
Data from the Dubai Ministry of Interior Naturalisation & Residency show that Dubai cancelled 54,684 residency visas in January, or an average of 1,764 every day, up 89 per cent from a year ago.
The outflow of non-construction workers, which have a far greater impact on the economy, will curb private consumption by 13 per cent this year, EFG-Hermes said.
As a result, the bank expects a price deflation of 2 per cent this year, with housing and rental prices sliding further. Housing is the largest component of the consumer price index, amounting to 36 per cent.
Tougher days lie ahead for the property industry, with rents seen falling by as much as 50 per cent in Dubai compared to last year’s increase of 21 per cent. Rents in Abu Dhabi and the rest of the emirates will remain flat in 2009.
EFG-Hermes forecasts that the downward spiral in Dubai property prices will also continue, with prices in 2009 sliding by as much as 60 per cent from their peak levels last year.
“We believe that 2009 and even next year will be tough for Dubai, and while Abu Dhabi will continue to diversify its economy, we hold the view that both consumption and investment are likely to slow,” said Sana Kapadia, property analyst at EFG Hermes.
The impact of a shrinking UAE economy will be particularly harsh in Dubai, in contrast to the other emirates and the rest of the region, said Malik.
“This is because of both the highly leveraged and externally facing nature of the Dubai economy. We will see a slowdown or contraction in a number of economic sectors, notably in real estate and construction as projects are cancelled or put on hold.”
Outside of property, other sectors such as finance, advertising and marketing will also contract.
“The reduction in advertising spent by real estate companies, falling hotel occupancy and room rates exemplify the weakness of the labour market and service-related sectors, EFG-Hermes said.
Lower oil prices and production will dent export revenue, adding further to the UAE’s economic woes.
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