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Feb 22 2009

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Dubai Economic Council Prepared a Study on Business Cycles in the UAE

The study commenced with an indication that economic activity always witness business cycles characterized by booming followed by recession represented by negative GDP growth rate or slowdown. This cycle might be short or long depending on the economic policies crafted by the government to tackle these situations.

The study also stated that the UAE economy experienced four booms and three recessions during 1975-2006. The average real GDP growth rate was 6% over this period. (Figure 1)

During first recession 1977-1978, the growth rate dropped from 14% in 1977 to (-5%) in 1978. In the same time, the fall in global demand on oil, and hence¾the fall in UAE oil exports and revenues, have resulted in low investment and public spending, subsequently, the recession got deeper. (Figure 2)




The second recession happened during 1982-1988, when the real GDP growth dropped as average by (-5%). This coupled with a decrease in oil exports as a result of global demand slowdown, and the UAE commitment of OPEC quotes system as well. (Figure 3)

The third recession happened during 1997-1999. The real GDP growth rate dropped from 8% in 1997 to approx zero in 1998. During this period, the UAE economy influenced by the financial crisis hit the South East Asia and Latin America economies. The crisis immediately started with a collapse in real estate and financial markets, then moved to many Asian banks and other countries. The crisis hit the international trade as well. Worth noting, the public spending and investment growth rates in the UAE have matched the GDP growth, and that was the reason behind a recession deep during this period. (Figure 4)

The study emphasized that due to the UAE economy openness and its integration with the global economy, the business cycles the country experienced influenced in a way or another by the dominating regional and global circumstances, such as developments in global oil markets, financial markets, in addition to political conditions, e.g., wars and crises.

Regarding the economic policies adopted by the UAE government to confront the three slowdown and recession cycles mentioned above, the study indicated that during 1974-2006 the policies were aligned with cycles. That is, the government increased its spending during booms, and decreased the spending during recession (Figure 5). Comparatively, the governments in developed countries usually adopt polices in adverse direction of cycles.

The data revealed that big drop in liquidity in UAE economy were proceeded all slowdown or recession situations. (Figure 6)

The annual average of nominal GDP growth rate approx 16% during 1974-2006, whiles the annual average of domestic liquidity growth rate approx 17%. But during slowdown and recession periods, the annual liquidity growth rate ranging 3%-11%.

In regard to monetary policy adopted by the government in the past, the study stated that due to begging to dollar system, the monetary policy in the UAE has aligned with monetary policy of the USA, therefore it's considered to be idle, and probably contradicting the national economy needs.

For instance, the monetary policy of the USA was contractionary to confront the inflation through raising the interest rate. Similarly, the UAE Central Bank raised the interest rate; the result was investment drop during 1982-1988, and 2007-2008. When the Federal Reserve Bank decreased the interest rate to confront the recession situation in the US economy, the UAE Central Bank did the same while the national economy faced a high inflation rate which entails interest rate rising.

The study ended with main conclusion, it's necessary that the UAE government to reconsider its economic policies during recession situations and replace them with expansionary policies. Conversely, she has to adopt rationalized policies during booms.

-Ends-

© Press Release 2009