Stronger growth in 2025 thanks to non-oil activity

Growth in the non-oil sector is expected to support the economic expansion in 2025. Wholesale and retail, transportation, construction, and financial services in particular will remain the main contributors to growth. The delayed unwinding of oil production cuts by OPEC+ to April 2025 will continue to put pressure on the oil sector. However, as these cuts should gradually disappear over the rest of the year, the oil sector’s contribution to growth is expected to increase alongside that of investments in the gas sector. Moreover, low inflation and monetary easing in line with the US Fed will support private consumption (around 50% of GDP). In addition, the new practices (golden visa, remote work visa, etc.) that the UAE has started to implement to increase the number of migrant workers will also support the increase in spending. Furthermore, the UAE's announcement of its largest-ever budget for 2025 suggests that the contribution of public spending (around 12% of GDP) to growth may increase. The latter contribution will be mainly driven by increased infrastructure investment and other capital expenditure. Last, the favourable business environment and growth-enhancing reforms (such as allowing foreigners to fully own companies under the new commercial law, moving weekends to Saturday and Sunday to match trading partners' working days, etc.) are expected to encourage more foreign investment into the country (nearly 6% of GDP in 2023). The economic authorities are expected to introduce similar reforms to respond to the increasing competition of Saudi Arabia to become an alternative trade and business hub in the region.

In light of the currency peg, the UAE Central Bank is poised to maintain its rate-cutting policy throughout 2025, mirroring the approach taken by the US Federal Reserve. We anticipate that the robust domestic demand, coupled with population growth, will sustain inflationary pressures from the demand side. Housing price increases may also exert some pressure on inflation. However, the low level of global energy prices is expected to offset inflationary pressures through transport prices. Given these risks, the central bank may adopt a gradual and cautious stance in the rate-cutting process.

Narrower twin surpluses expected in 2025

The fiscal surplus is projected to narrow in 2025, in line with the announcement of the largest budget in the country's history. Lacklustre oil revenues will meet higher expenditures related to energy and large infrastructures meant to achieve the economic diversification goals. The government has set a target of investing between AED 150bn (USD 40.8bn) and AED 200bn (USD 54.5bn) in the country's renewable power capacity by 2030, as provided in the National Energy Strategy. However, the fiscal surplus will continue to feed the sovereign wealth fund and enable the country to continue investing abroad.

In 2025, the current account balance is forecast to remain in surplus, albeit at a lower level than previously. This is due to an anticipated increase in imports resulting from infrastructure investments. Concurrently, remittance outflows (around 7.5% of GDPin 2023) from foreign workers will add to this trend. In addition, the UAE is underutilising their current oil production capacity (hydrocarbons account for around 20% of goods exported) which stands at 4.85 million (mn) barrels per day (b/d). Current capacity is well above the country's actual output of 2.96 mn b/d. The postponement of the OPEC+ oil production hike until at least April 2025, coupled with the prevailing lower energy prices, will have an adverse impact on the UAE's export revenues.

Political stability in a volatile region

The UAE is set to maintain its political stability following the appointment in May 2023 of the eldest son of the Federation’s and Abu Dhabi’s leader as Crown Prince of Abu Dhabi; he is also the potential successor to the presidency of the Federation. The current stability is set to reinforce the country's position as a global and regional hub for finance, shipments and trade. However, the Emirates' imperfect transparency and democracy will continue to present challenges.

The post-Assad developments in Syria may offer both opportunities and risks for the UAE. On the one hand, the UAE's construction and energy companies may find opportunities in the reconstruction process. On the other, the change in the regime could also result in regional power shifts and heightened uncertainty, which may impact the business environment.

In 2025, the capacity of the UAE to maintain a balanced approach upon the arrival of the new US administration, the growing influence of China in the Middle East and the evolving interests of Russia will be crucial.