Increased oil output and government spending are helping drive a resurgence in economic activity.
Higher oil output and spending lift economy
Higher oil production and increases in public spending are underpinning stronger growth as the UAE economy enters the second half of the year.
Greater numbers of visitors to hotels and shops have also boosted the economic pick-up as the country benefits from unrest elsewhere in the Middle East and North Africa.
The rosier outlook has prompted Emirates NBD, the biggest UAE bank, to raise its GDP forecast by 0.6 per cent. It now expects the economy to expand by 4.6 per cent, up from 1.4 per cent last year.
"Increased oil output this year will be reflected in stronger overall economic growth," said Khatija Haque, the GCC economist at Emirates NBD.
"Oil production had been expected to be around 3 per cent higher for the year but it is already 6.2 per cent," she said.
The economy has proved to be a haven from the instability that has left some other Middle East nations facing dwindling foreign reserves or falling tourist numbers. Activity has risen particularly strongly in the oil and services sectors.
Like most other Gulf states, the UAE has lifted oil production since March to offset a decline in supply from Libya.
Oil revenues, which account for more than a fifth of the UAE's GDP, are set to benefit from high production and high prices.
Brent crude, the European benchmark, has flirted with the US$120 mark since the civil war in Libya cut off shipments from the Opec member country, and the Emirates has stepped in to supply the market.
Last month the UAE pumped 2.49 million barrels per day (bpd), up from 2.3 million bpd last year. Larger oil revenues are making it easier for the Government to raise spending.
"Abu Dhabi looks stronger in the second half of the year in terms of government spending," said Nancy Fahim, a regional economist at Standard Chartered Bank.
The bank forecasts expansion of 4 per cent this year.
Abu Dhabi's budget, which accounts for about three quarters of total UAE spending, is expected to increase this year as expenditure on infrastructure rises.
Higher public spending will trickle down to support growth in the non-oil economic sectors, say economists.
The retail sector is booming, with many stores seeing double-digit growth in sales this year compared with last year.
The retail splurge is also predicted to continue among the big players on the back of more tourists, greater consumer confidence and a strong period between Eid and the end of the year.
LuLu, one of the country's largest retailers, is expecting to report an 18 to 20 per cent growth in sales this year, driven by new store openings and sales of food, electronics and household appliances.
"It's a positive outlook, people are out spending, [and] they are buying for trips, friends and family," said V Nandakumar, the corporate communications manager at Emke Group, which runs LuLu Hypermarkets.
Hotels in Dubai have reported increases in occupancy levels this year, despite an increase in the supply of rooms, as they have benefited from regional unrest and the relative affordability of the emirate compared to when rates were at their peak. There has been an influx of Saudi visitors in particular as they avoid destinations including Bahrain and Egypt, hoteliers say.
Dubai's hotels reported an average 13.6 per cent growth in the first quarter of the year in the total number of guests they received, according to data from the Dubai Department of Tourism and Commerce Marketing.
Despite the resurgence in growth, however, the economy remains in "recovery mode" after the global downturn, said Simon Williams, the chief economist for HSBC in the Middle East and North Africa region. Still, he expects GDP to expand 4 per cent this year.
"This year is better than last year, and 2012 will be better still, but constraints on growth remain, whether that's the debt profile of Dubai or continued weakness in the property market," he said.