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The world has been facing a series of disruptions, from the COVID-19 pandemic to ongoing military conflicts and shifts in economic policies. Among the most pressing current concerns are the escalating trade tariff disputes between the United States and other nations, as well as the continued military confrontation between Russia and Ukraine, with support from Europe and the United States.
A potential escalation of the tariff war could result in a slowdown of global economic growth, or even trigger a recession if it crosses critical thresholds. At present, many businesses have adopted a wait-and-see approach, closely monitoring the global
implications of these developments. As previously stated, our base-case scenario remains that the trade tensions are unlikely to cause a significant global downturn, as such an outcome would be detrimental to all parties involved. We believe the new U.S.
adminstration is acting with rational consideration and has thoroughly assessed the potential economic and political consequences.
The direct impact of tariffs on the UAE economy is expected to be limited. As indicated in the table below, tariff levels typically correlate with the size of a country’s trade deficit with the United States. The UAE falls within the ‘green’ zone, given that the U.S. maintains a trade surplus in its bilateral trade with the UAE. As a result, it is unlikely that the current tariffs will rise dramatically for UAE.
Exhibit: UAE is less affected by tariffs
Source: Office of the US trade representative
Furthermore, as the chart below illustrates, the United Arab Emirates (UAE) experiences a limited direct exposure to tariffs due to its limited goods trade with the United States, unlike many other nations. Consequently, the share of US exports in the UAE’s economy is relatively insignificant.
Exhibit: UAE economy has a limited direct exposure to US tariffs
Source: Office of the US trade representative
Nevertheless, we will outline the potential consequences under a stress-case scenario. Although the current tariffs have limited direct impact on GCC economies, potential indirect effects remain a concern. These may include: (1) a decline in oil prices in the event of a global economic slowdown; (2) a weaker U.S. dollar if trade flows shift away from the United States; (3) a slower pace of global interest rate reductions; and (4) reduced economic activity among key UAE trading partners, which could put budgetary pressure and dampen growth in non-oil sectors. That said, this is not our base-case scenario. While we acknowledge the possibility of a global economic deceleration, we do not anticipate it will be substantial.
Oilprocessdecline:
The UAE economy is likely to withstand a decline in oil prices, supported by its reduced reliance on oil revenues and substantial fiscal buffers. As noted in our previous analyses,
even during the sharp drop in oil prices in 2014–2015, the UAE maintained its government spending levels providing countercyclical activity. However, a prolonged and significant
decline in oil prices could still have an adverse impact on the broader economy but not expected.
WeakerUSDollar
Should trade with the United States decline, the U.S. dollar may weaken. Given the UAE
dirham’s peg to the U.S. dollar, this could lead to a temporary decline in the value of dirham- denominated investments – like real estate. However, any such impact is expected to be
short-lived, as the U.S. dollar is unlikely to relinquish its role as the world’s primary reserve currency.
Slowerreductionininterestrates
Inflationary pressures resulting from higher tariffs may prompt central banks to adopt a more cautious monetary policy stance via decelerating of interest rates reduction or even hiking them temporarily. Consequently, this could impact disposable incomes and constrain mortgage availability, thereby affecting demand for property. On the other hand, elevated
inflation is also likely to drive increased demand for investments in tangible assets, including real estate, as investors seek to preserve value.
Declineineconomicactivityoftradepartners.
In the event of a global economic slowdown, economic activity in the UAE is also likely to be impacted, potentially resulting in correction in real estate prices. However, due to recent structural reforms—such as economic diversification, improvements in quality of life, and a growing share of a more settled population (as detailed in our previous research)—any such corrections are expected to be more limited compared to past cycles. A subsequent economic recovery is anticipated to support a rebound in real estate market performance.
As previously discussed in our previous articles, the United Arab Emirates’ politically neutral status and its reputation as a “safe haven” have yielded numerous advantages. During
periods of heightened conflicts, the UAE experienced an influx of capital and skilled migrants from various regions. Notably, it has become a haven for numerous Russian and Ukrainian individuals fleeing military conflicts or seeking to safeguard their capital from political
uncertainties.
The current rhetoric in the European Union and UK to increase military spending in response to the perceived “Russian threat” raises additional concerns within the EU regarding potential safety risks. This escalation could potentially lead to an influx of capital and
migrants from this region. Notably, property buyers from the United Kingdom, France, and Italy were among the top ten nations purchasing property in Dubai. While high taxes and
reduced disposable incomes, particularly among the young population, are currently driving migration outflow from these countries, safety concerns may assume a more significant role in shaping these dynamics.
Although there is a possibility of a positive economic impact on EU economies due to increased government military spending, the current uncertainties may compel additional capital outflows in pursuit of diversification. The recent decision to increase military spending is likely to strain the social components of government budgets, thereby reducing the quality of life in these countries, which may further exacerbate migration outflow. As indicated in the graph below, the budgets are currently in deficit, and any increase in military spending will likely be at the expense of infrastructure or social benefits.
Exhibit: Budgetary contains will likely lead to lower quality of life in case of rise in military expenses
Source: adapted from Destatis
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