Standard Chartered expects a slight pick up in the UAE's non-oil economy with a 3.2 per cent growth in 2017 supported by "a loosening of belt" by Abu Dhabi.
The bank predicted the country's overall economic growth for 2017 at 1.5 per cent, instead of 2.1 per cent as previously estimated, based on a 2.3 per cent contraction in oil GDP.
In its Global Focus report, the bank raised the UAE's 2016 growth estimate of the UAE to 2.6 per cent from 2.4 per cent prior, on 2.7 per cent predicted growth in oil GDP and 2.6 per cent growth in non-oil GDP.
Dima Jardaneh, regional head of Research, at the bank said the lender expects inflation in the UAE to pick up this year after moderating in 2016. The latest monthly data shows inflation rose to 2.3 per cent year on year in January from 1.2 per cent at end-2016 on the back of higher gasoline prices as domestic fuel prices were raised by 0.6 per cent for January. "We factor in another increase in prices in 2018 assuming that VAT is introduced as planned," she said.
The bank expects fiscal deficit to narrow further. "Based on nine-month 2016 results and factoring in higher non-hydrocarbon revenues, we revise our fiscal deficit estimate to 1.5 per cent of GDP for 2016, down from 2.8 per cent before.
The bank raised the surplus estimate to 2.1 per cent for this year from 1.5 per cent prior and 4.1 per cent per cent in 2018 as against 3.3 per cent estimated before.
"We see this improvement in fiscal performance as an opportune time for the government to consider stimulus policies to boost growth," said Jardaneh.
According to preliminary balance of payments data, trade balance narrowed in 2016 to $68 billion from $89 billion in 2015. "This is largely attributable to the lower value of hydrocarbon exports, which could not be offset despite lower imports. We revise our current account surplus estimate to 3.2 per cent of GDP for 2016 from 1.9 per cent on account of lower imports. On the back of this, we also raise our forecasts for 2017 to 6.1 per cent and 2018 to 6.5 per cent," she said.
The bank's chief economist, Marios Maratheftis, said the world economy is currently benefiting from strong US growth, solid export data from Asia and booming asset markets. Much of this comes down to a few common factors - high (but not too high) oil prices, China's inventory cycle, and reflation expectations in the US.
He said US policy poses a particular risk to the outlook. "Although markets are excited about the prospect of President Trump's reflationary policies, it is still unclear as to whether they will materialise."
At the same time, the Fed is embarking on a rate-hiking cycle. This should not be too problematic over the coming months, but tighter monetary policy should ultimately impact economic activity, likely in 2018, said Maratheftis.
"Oil prices are now in a sweet spot. Ranging between $45 and $65, they are not so high as to be inflationary and hinder growth and they are not low enough to lead to a deflationary spiral and a lack of investment in oil production," said Maratheftis.
"Despite elevated levels of event risk, the world economy has started 2017 well. Animal spirits are back. We think the world economy still has room to run over the next few quarters but strong confidence alone will not be enough to sustain this," he said.
He said the positives currently being felt are mostly transitory in nature, and expects monetary policy tightening to dampen growth over the medium term. "Events will be crucial to keeping animal spirits strong and for now, the key risk is US policy unpredictability and the threat of trade wars," said Maratheftis.