|03 July, 2019

UAE economy stable as markets prepare for Q3 challenges

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

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Buying of 'safe haven' assets has retreated since a truce was reached in the trade dispute between the U.S. and China at the recent G20 meeting

The UAE’s economy appears stable as global markets prepare for third-quarter challenges such as international trade disputes and the risk of a slowdown stemming from related uncertainties.

The UAE’s first-quarter GDP growth was steady at 2.2 percent with a 1.6 percent growth in the non-oil sector. This marks a wider economic diversification and is a positive development supporting growth amid volatile times for oil prices. One of the first ‘victims’ of a global slowdown would be crude oil prices because demand would theoretically be lower for black gold. Fears over a global slowdown have prevailed because of the trade disputes between the United States and China, and oil prices have felt the pressure.

Fears turned to euphoria after the U.S. and China agreed to restart trade talks in the wake of the recent G20 meeting. Further tariff hikes between the world’s largest economies appear to have been shelved at the time of writing. While the new developments may raise hopes of a lasting trade deal, given the history and unpredictability of the trade dispute, investors may stay sensitive to any signs of disagreement between U.S. President Donald Trump and Chinese President Xi Jinping.

In an indication that the markets have welcomed a potential end to the increased obstacles to free trade, safe haven buying subsided. Crude oil prices rose sharply as expectations improved over global oil demand prospects and OPEC appears set to maintain production cuts to support oil prices.

Gold prices tracked the change in mood, dropping below the psychologically-important level of $1,400. The Federal Reserve’s dovish stance on U.S. interest rates has pressured investor sentiment but these doubts appear to have lifted, at least temporarily.

The market-friendly outcome to the G20 meeting has injected financial markets with a sense of optimism and hope over a resolution to U.S.-China trade disputes. This affects the UAE in several ways in the short term. The U.S. dollar declined towards the end of the second quarter and appeared headed towards a bearish trend. Now that the U.S. and China are on track to restart talks, this expectation may have to change and sure enough, the dollar index (DXY) perked up in the aftermath of the G20 meeting.

Does this mean it will all be smooth sailing on the international economic seas in the third quarter? This is unlikely, given the high-stakes negotiating tactics between the U.S. and China, which reached the stage of playing hardball last year. In addition, the UAE’s growth may face resistance from OPEC production cuts and increased competition from U.S. shale undermining regional oil sales. The risk of this happening could be countered if non-oil growth continues.

There will be a strong focus on the Federal Reserve’s stance on US interest rates which are mirrored in the Gulf. Should economic data from the United States disappoint during the third quarter of 2019, this may fuel expectations of a potential U.S. interest rate cut. Inflation in the UAE declined in the first quarter, according to the Central Bank of the UAE. If the Federal Reserve does cut interest rates in Q3, it’s likely the UAE will follow suit, possibly leading to less attractive deposit and bond rates but boosting borrowing and investment power.

To sum up, the uncertainties persist to a lesser extent considering that the circumstances could change rapidly if there are signs of disagreement between the US and China and if economic news shows further weakening in the global economy.

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