The country's economic growth estimate for last year has been lowered by more than two per cent by the Ministry of the Economy, a possible sign that property and construction inflation is beginning to takes its toll. The ministry said yesterday it now expected gross domestic product (GDP) for last year to be 5.2 per cent, down from previous estimates of 7.6 per cent. The ministry also revised real GDP growth figures going back to 2001. "Real" GDP is a measure of the total output of an economy, adjusted for rises in the prices of certain domestically-produced goods and services.
The ministry revised real GDP to Dh498.70 billion (US$135.8bn) last year, up from Dh473.91bn in 2006. That represents a rise of approximately 5.23 per cent, a significant revision from figures released in March and the slowest rate of growth since 2002. Nominal GDP, or GDP not adjusted for rises in the prices of some locally-produced goods and services, including oil, was revised upward by the ministry, to Dh729.73bn last year, up 16.8 per cent. The estimate of nominal GDP in March had been a 16.5 per cent rise.
The increase suggested that higher estimated inflation overcame any decrease in estimated economic output. It may also point to the effects of rapidly rising oil prices, which account for a large portion of nominal GDP in the UAE, the world's fifth-largest oil exporter. Officials at the ministry could not be reached for comment yesterday. Reuters reported that no reason was given for the revisions.
The most likely culprits for the decline in real GDP estimates, however, appear to be rising property and construction costs. Both have been rising precipitously. Construction costs in the GCC increased by about 30 per cent last year, according to the Kuwaiti developer Al Mazaya Holding. And steel reinforcement bar (rebar), a key component of the concrete framework of buildings, has gone up by about 35 per cent since May, according to mesteel.com. Cement prices have also risen rapidly, though the UAE has capped them at Dh340 per tonne.
Housing prices have jumped at an equally alarming rate, bringing impressive gains onto the books of speculators but dampening real GDP growth as consumers spend more of their money on living expenses. The resale value of homes in Dubai increased by 19 per cent last year, according to one recent estimate. Rents across the UAE surged 17.5 per cent last year, according to government figures. "If you asked me to bet on it, I would say the revision is probably due to the construction and property sectors, since they have such a prominent role in GDP and are also where inflation is highest," said Fabio Scacciavillani, an economist at the Dubai International Financial Centre. "The preliminary estimate [in March] had been done on a certain price assumption, but when they got the actual numbers, perhaps the assumption turned out to be an underestimate."
Economists said yesterday that the revision in GDP figures, while significant, was far from surprising. GDP is notoriously difficult to keep track of, and even governments in developed countries find it a chore to measure with any accuracy or timeliness. The Ministry of Economy revised GDP figures last year as well. In August the ministry said GDP growth in 2006 was 9.4 per cent, up from the 8.9 per cent it had reported that March. At the time, the ministry said revisions were due to a faster-than-expected expansion of the oil industry.
Yesterday, the ministry revised 2006 growth to an even higher level, putting it at 11.6 per cent. "GDP revisions, even for countries like the US, Germany, Italy and others, can be substantial years after the first estimate," Mr Scacciavillani said. An accumulating trickle of years-old data can have a dramatic effect on assessments of a country's economic past, he added. "We say that making economic policy is like driving a car looking at the rear view mirror," he said. "Not only do you not know the future, but you don't know where you are at present. Even the not-so-distant past appears unclear; it's only an estimate."
Production output was also cut in several sectors. The most significant reduction was petroleum, which saw output fall to Dh121.33 billion, a drop of 1.2 per cent from the previous year. The figures in March had shown a one per cent climb in oil sector output. Manufacturing and construction output were also cut back. New estimates put manufacturing at 12.4 per cent last year, down from 15 per cent. Construction gained 14.4 per cent, down from a 17 per cent estimat in March.