Dubai inflation should not be played down

The majority of 2014 forecasts for UAE’s economy reflect positive performance statistics and optimistic sentiment. According to official representatives of the government, this year, the country will witness a growth of up to 4.5%-5%.

However, the inflation rates correspond to the optimistic forecasts and are also on the way up. A number of private economists predicted that the huge price spike on the real estate market will lead to inflation in the country.

Even more worrying is the fact that the International Monetary Fund (IMF) also expresses similar concerns in the course of the past one and half year. Like the government of the United Arab Emirates, IMF shared that it expects to see an economic growth of about 4.5% in 2014. Nevertheless, it also pointed out a number of times that the country might witness a property bubble.

In 2013, residential rents and property prices in Dubai jumped from 20% to 50%. The main reason is the abolishment of the 5% rent cup supported by the win to host World Expo 2020 which encouraged higher expectations about new projects, more tourists and higher profits. In addition, again because of the Expo, Dubai’s GDP is predicted to increase by 4.7% in 2014 and by 5% in 2015. The growth will mainly be triggered in sectors like tourism, transportation, communication, logistics and trade.

However, the combination of rising rents and property prices and this projected rapid growth may bring to Dubai a new disaster – unseen inflation or even hyperinflation. Just like the growth prediction for the country are estimated at 4.5% to 5% for 2014, inflation levels may exceed 5%. The UAE has not seen such inflation since the 2008 Dubai property crash, when inflation levels hit 12.3%.

A high-inflation scenario will not have a good effect on Dubai’s economy or, as a matter of fact, the entire country. That is due to the fact that UAE’s currency is fixed to the U.S. dollar. As a result, the central bank will not have the chance to influence the situation because of the low interest rates in the U.S.

But rates are not the only factor to blame here. Dubai also witnesses a capacity problem. The output gap is really limited right now. That could easily result in an inflation jump. Therefore, Dubai’s economy in 2014 may not be characterized so much with a growth, but rather with a high inflation.

The evidence for the potential inflation dangers is already visible. Last year, inflation in the country reached 1.1%. But in the fourth quarter, the monthly figures were much higher. The last time the United Arab Emirates saw such a high inflation level was back in 2009. Moreover, only two year ago, in 2012, inflation in the UAE hit its lowest levels since the beginning of the 1990s on the back of lower property prices.

Financial experts say that an inflation of 4.5%-5% for 2014 may not be that worrying. Still, the inflation rates require control in order to stay around this levels. Otherwise, the new boom may go out of hand.

Dubai inflation is a real problem that can have serious consequences. That is why it should not be overlooked or played down.