Main aspects of UAE's economic growth in the new millennium

The new millennium started off with one of the greatest periods of political uncertainties in the history of mankind following the disastrous events of 9/11 and its repercussions. These events significantly impacted the world economy (impacting both developed and developing countries) and sent it deeper into the recessionary pit. For the UAE, the events translated into sharp decline in oil prices from an average of $24.08 per barrel in August 2001 to $20.82 in September and then to $16.21 during December of the same year. Nonetheless, oil prices climbed back to their pre-9/11 level by August 2002, reaching $24.90 per barrel. The following discussion takes an analytical look at the productive structure of the UAE economy during the period that followed the events of 9/11. It examines the sectors of the economy at their sub-sectoral levels to give a clear picture of what is driving change in each economic activity. Due to space limitations, few sectors are not examined in the ensuing analysis.

GENERAL GROWTH PERFORMANCE

In general, the UAE economy recorded a remarkable average annual growth rate of 9.4 per cent during 2001-2004. Despite rising oil prices in recent years, the non-oil sectors outperformed output expansion in the oil sector by more than threefold. This is a clear indication of the growth potentials of the UAE economy and how its sectoral structure has shifted in favor of diversification.

OIL SECTOR

As oil prices rose from an average of $23 per barrel in 2001 to $37.41 in 2004, the sector witnessed an increase in its nominal contribution to GDP from AED75 billion to AED123.3 billion during the same period. Regardless of the upward swing in oil prices, diversification efforts have reduced the share of the oil sector in the country's GDP from 33 per cent in 2001 to 28.9 per cent in 2004. In response to a slight decline in the average oil price in 2002, oil production contracted by -7.6 percent during that year. However, the significant increase in the price from an average of $22.81 per barrel in 2002 to $27.69 in 2003 lead to a remarkable increase in oil production by 13.6 per cent.

AGRICULTURE SECTOR

Although the UAE economy does not possess the characteristics to succeed in agricultural development, government subsidies have contributed to support the sector's growth over the last three decades. Being one of the slowest growing sectors in the UAE, the share of agriculture in the country's GDP has declined from 5 per cent in 2001 to 4.3 percent in 2004. The majority of this sector's activities are concentrated in cultivation and crops, which represented an average of 79.7 per cent of its production during 2001-2004. Livestock (with a share of 13.7 per cent) and fishing (6.6 per cent) are the other two important categories of economic activities within the sector. Sever weather and soil conditions coupled with tough competition from imports make growth potentials for the sector very difficult. During the last two years (2003-2004), fishing activities has shown significant growth, averaging 4.4 per cent per annum.

MANUFACTURING SECTOR

Industrial activities have recorded remarkable growth over the last 4 years in the UAE. Production originated in the manufacturing sector grew by 3.6 per cent in 2001, recorded a significant rise of 7.9 per cent in 2002, and jumped by 15 per cent in 2004. As a result, the value of manufacturing output climbed from AED35 billion in 2001 to AED45 billion in 2004. With an average annual share of 19.3 per cent in the country's GDP during 2001-2004, the UAE is far ahead than other GCC countries in terms of increasing diversification through industrial contribution. The sector's industrial activities can be divided into two main categories: Oil and gas industries and other industries. Oil and gas related activities represented on average 42.7 per cent of the sector's output during 2001-2004. The growth rate of the oil and gas industries has been remarkable during the last four years. The growth of output produced by the oil- related industries contracted by -2.0 per cent in 2002, increased by 9.7 per cent in 2003 and reached 19.9 per cent in 2004. Large public investments in the petrochemical industry and the completion of major projects might be responsible for this accelerated growth. On the other hand, the non-oil related industries have maintained an average annual growth rate of 8.6 per cent during 2001-2004.

ELECTRICITY, GAS AND WATER

To face urbanization growth throughout the UAE, utilities have been growing at an average of 10 per cent per annum in the first four years of the third millennium. This rate of growth matches the general average for the country's non-oil economy. As a result, the share of electricity and water contribution to the country's GDP has been fixed at 2.7 per cent.

Gas production (which forms only 1 per cent of the sector's GDP) has shown remarkable growth during the period under study, posting an annual average of 103.8 per cent. The majority of activities in the utilities sector are concentrated in electricity production (comprise 57 per cent of the total) and water (42 per cent). While water production maintained a constant annual growth of 8 per cent during 2003-2004, electricity production grew 18 per cent per annum.

TRADE

The activities in this sector are divided into: Wholesale and retail trade and maintenance. Trade activities represent 90 per cent of the sector's contribution to GDP. At 15.6 per cent average annual growth and 14.3 per cent share in the country's GDP, trade remains one of the most important and fastest growing activities in the domestic economy.

HOSPITALITY SECTOR

HOTELS AND RESTAURANTS

Hospitality activities consist of 55 per cent hotels and 45 per cent restaurants. Over the last four years, hotels have been growing on average at 4.7 per cent annually, while restaurants were growing at an accelerated rate of 10 per cent. The total value of the restaurants business has grown from AED2.3 billion in 2001 to AED3 billion in 2004. Despite its visible expansion, the share of the hospitality sector in the country's non-oil GDP has declined in real terms from 3 per cent in 2001 to 2.8 percent in 2004.

Transportation, storage and communication

At a share of more than 10 per cent of the UAE's non-oil GDP, this sector is considered one of the most important in the country's development efforts. Among all types of transportation, air transportation has grown at a remarkable average of 22.3 per cent per annum over the period 2001-2004. This increased its share in the sector's transportation output from 36.6 per cent in 2001 to 50.6 percent in 2004. In 2004, land transportation comprised 39.6 per cent of the transportation activities in the UAE and the share of marine transportation stood at 9.8 per cent. Communication remains responsible for the biggest share of the sector's activities (averaging 35.5 per cent share in the sector's GDP), while the share of storage and logistics is considered negligible at 0.6 per cent.

FINANCE

Financial services have a unique role in any economy and they usually move in tandem with real activities. The financial sector grew by an annual average of 12 per cent during 2001-2004, and it produces 9.1 per cent of the country's GDP. The majority of financial activities are in the banking sector, with an average share of 85.5 per cent of the sector's GDP during 2001-2004. Nonetheless, the insurance segment of financial services is growing faster than the banking industry and it has increased its share in the sector's output from 12.7 per cent in 2001 to 15.6 percent in 2004.

CONCLUDING REMARKS

The UAE economy has shown resilience to various political and economic shocks that hit globally and at the regional level. This reflects the confidence level that economic participants have in the country's economy. With an expected further rise in oil prices, the UAE economy is expected to show remarkable growth performance over the next five years.