UAE: Expanding economy and policy initiatives boost labour participation

UAE's economy is forecast to grow by 3% in 2023, most momentum coming from non-oil sectors. Labour participation rates are rising, boosted by government initiatives to support economic growth. The introduction of unemployment insurance will likely attract more workers and add to non-life insurance sector premiums. Headline CPI is projected to moderate at around 3.5% in 2023. Given UAE's currency peg, the central bank will follow the US lead on interest rate moves. That said, still elevated rates will help keep a lid on inflation pressures.

• We forecast the UAE economy will grow by 3% in 2023, slower than in 2022 due to cuts in oil production.
• The outlook is positive, with ongoing expansion in the non-oil sector sustaining robust growth in the medium and long terms.
• We expect headline CPI inflation to moderate to 3.5% this year from 4.8% in 2022, with central bank interest rate hikes keeping a lid on price pressures.  
• Labour market participation rates have improved post COVID, with unemployment declining from 4.3% in 2020 to 3.3% in 2022.

The United Arab Emirates (UAE) economy will grow by an estimated 3.0% in 2023, after a strong 7.9% gain in 2022. The slowdown will be largely due to OPEC's recent decision to cut production of crude oil.¹ However, robust activity in other (ie, non-oil) sectors like real estate and tourism, should help maintain steady growth. For example, Dubai's residential market saw 57 737 transactions in volume terms in the first half of 2023, up 48% from a year earlier. Residential home prices were up 17% in June year-to-date, the strongest increase since late 2014.² Meanwhile, tourists' arrivals in Dubai grew to 4.67 million in 1Q23, nearing pre-pandemic levels of 4.75 million in 1Q19. The S&P Global' s UAE PMI reached a new high of 56.9 in June, driven by a rise in new orders, output and employment growth. The PMI sub-indices for employment rose to 80-month high in April. We expect demand and employment growth in the non-oil sectors will continue to support the economy's expansion trajectory. Ongoing investments in infrastructure and efforts to diversify away from the oil sector, should sustain economic growth over the medium and long terms.

After rising to 4.8% in 2022 due to increases in transportation, food and beverage costs, headline Inflation is expected to moderate to 3.5% in 2023. There will be various drivers including fuel subsidies, and price caps on food and essential items. Further, the Central Bank of UAE (CBUAE) increased the policy rate by 25 basis points (bp) to 5.15% in May 2023, making for a cumulative increase of 340 bp since April 2022. Elevated interest rates will help contain inflation pressures, and also support insurance sector earnings with stronger investment returns. The dirham is pegged to the US dollar and as such, the CBUAE will follow the Fed's lead in the current interest rate cycle. With inflation pressures persistent, we see the near-term risk for US rates as being to the upside, with a first rate cut in the first quarter of 2024 at the earliest.³

Table 1: Key macroeconomic indicators

Employment in UAE has increased steadily and has surpassed pre-COVID levels (5.5 million employed in 2022 vs 5.1million in 2019). The jobless rate has declined from the peak of 2020, although it is still higher than pre-COVID levels. Construction is a key sector, employing 25% of the workforce in 2022, followed by the wholesale and retail sector (21%). Employment in construction increased in 2022 after contracting during the pandemic, but has yet to reach pre-COVID levels. The number of people working in the real estate has grown most over the last decade, reaching 1.1 million in 2022, more than double  of 0.4 million.

More broadly, the number of private companies registered in UAE is on the rise, and this is supporting employment growth. UAE relies heavily on foreign labour, which is mostly employed in the private sector. The labour participation rate among locals is less than 50%, and most work in the public sector. The overall labour market continued to expand in 1Q23, with double-digit growth in employment and wages. Various initiatives by the Ministry of Human Resources & Emiratization, such as allowing employers to offer temporary roles and allowing employees to work for two employers, has helped increase the labour participation rate. Meanwhile upskilling and self-employment initiatives as part of the  Emiratization programme led to an 11% increase in the participation rate locals in the first quarter of 2023.⁴

Figure 1: Total employment by sector (in millions)

Figure 2: Unemployment rate

The introduction of unemployment insurance in January 2023 should entice more people to enter the labour force. The knowledge of some financial security in the event of job loss will likely attract more workers, including foreign labour. And, with continued influx of foreign workers, this will build on the market's existing skillsets and help make the UAE more competitive. By July this year, more than 5 million (locals and expatriates) had subscribed to the scheme. This new line of business will boost non-life insurance premium volumes, which we estimate totaled USD 10.5 billion in 2022.