Blog Post

COVID-19 and its economic fallout entailed a major shock to the UAE’s open economy. Low oil prices and OPEC+ production cuts hobbled the hydrocarbon sector, the backbone of the economy, while the service-oriented non-hydrocarbon economy was severely affected by disruptions in global trade and travel. The UAE’s near-term economic prospects depend critically on being positioned to benefit from the recovery of the global economy. The country’s long-run priority is to further diversify the economy and create jobs in the private sector.

Recent Developments
COVID-19 and its economic fallout exerted a heavy toll on the UAE’s open economy, leading to a contraction of 4% in the first half of 2020 year-on-year (y/y). The volume of oil production declined by 4.4% (y/y) in the second quarter of 2020, in line with the OPEC+ production cuts agreement. The non-hydrocarbon sector contracted by 6% for the first half of 2020, as strict lockdown, travel bans, and supply chain disruptions constrained tourism, construction, and trade activities. Non-hydrocarbon activity began to show signs of recovery in the third quarter of 2020, with the resumption of international travel, relaxation of lockdowns, and large-scale monetary and fiscal measures.

Outlook
The economy is expected to rebound in tandem with the recovery of the global economy. The hydrocarbon sector would regain strength with rising global oil prices, helping to restore the fiscal and external positions, and boosting confidence in the overall economy. This, coupled with a sustained recovery of global trade and travel, would allow the non-hydrocarbon sector to rebound. The normalization of relations with Israel and Qatar could expand economic opportunities. But the pandemic could have a lingering impact on global travel, hampering a speedy recovery of the UAE’s large tourism industry.