Why the UAE GDP Growth Slows to 2.3% in the Year 2012 - Case Study Example

UAE GDP growth slows to 2.3% in the year 2012 Name Course title University Date Acknowledgements I wish to acknowledge the writer at the below website for providing this article that I used to analyze the GDP growth of United Arab Emirates (UAE) (http://www.reuters.com/article/2012/03/14/imf-emirates-economy-idUSL5E8EE6CY20120314) Table of contents Topic page number Abstract……………………………………………………………… 4 Introduction………………………………………………………….4 Stage of the business cycle……………………………………………6 Contraction fiscal policy………………………………………………7 Macroeconomic indicators……………………………………………. 9 Conclusion……………………………………………………………..11 References ……………………………………………………………12 Abstract UAE GDP growth slows to 2.3% in the year 2012 United Arab Emirates is regarded as the central point for world business and this country has notably witnessed the expansive domestic growth brought about by the world business transit routes. We look into how the country has been able to proceed during the hard times of the global recession and how its domestic economic growth has performed for two years (2011-2012). We also analyze various policies that can be undertaken by the government to regulate and control the growth of the economy in the right direction without adverse effects on the low income citizens. We also purposely analyze various macroeconomic factors that lead to the decline in the GDP growth in the year 2012. Introduction The United Arab Emirates is a Middle East nation within the Asian continent. It is arguably one of the most developed nations within the expansive Arab world owing to the rich crud oil deposits and its location on the world business transit routes since many years ago if not centuries. Many of its citizens are expatriates with the native population forming only a small percentage of population. With Dubai being the largest city within the borders of the Arab peninsula nation, then nation ought to have high value economy because Dubai is the central point where most of the world big businesses transact daily. However in the recent years, the economy has suffered negatively due to social economical factors that have affected all the nations across the world especially the global recession period that affected some European nations that resulted to them being bailed out. The international monetary fund (IMF), undertook an investigation into the united Arab emirates economy and came to a conclusion that the nation`s GDP would slow to around 2.3% in the year 2012 which turned to be very true. On date march 14 in the year 2012, the IMF made the announcement of a slowing economy that was to dim by about 2.3%. In the previous year, the estimation was around 4.9% which was definitely worse. The business experts within this gulf nation came up with a fiscal policy to cushion the economy from a further decline. Several factors played a key role to declining economy. Since the nation depends on oil exports, then prices of the crude oil play a key role on how the economy will perform. Huge production of barrels per day preceded by good prices per barrel, then the economy will perform out rightly well, but in our realm, we see there is limited chance of increasing the quantities of oil production in the near future. This translates to constant economic growth of 2.3%. In the previous year the forecast was 4.9% which was greater than the 3.9%value predicted by the economic analysts through a poll by the Reuters media network in December, 2011. The United Arab Emirates nation has been able to recover form the 2009-2010 Dubai debt crises because of the favorable global oil prices and very friendly trade flows with the rest of the world. This particular debt crisis was brought about by the introduction of around $25 billion into the property sector especially the state owned Dubai world. Various certain global economic and hard financial situations pose great risk to the companies practicing business in the nation due to the ever maturing external debt regardless of the various measures that have been put forward by the government of the nation. Debt reconstructing is one of the measures put forward for the state-linked business entities but this measure has not fully resolved the menace hence the companies still rely on foreign borrowing from other world nations. Stage of the business cycle The United Arab Emirates economy is actually in a stage that can be described as the contraction stage in the business cycle. During the contraction stage in the business cycle, the economic growth of any particular nation especially at this modern age, normally grow form the range of 1% to 3%. The GDP growth of the United Arab Emirates was established to grow by 4.9% in the year 2011, in the following year the IMF predicted the GDP growth to be around 2.3%. You can notice the GDP growth in the year 2012 was half of what happened in the year 2011. This decline in the economy growth is as a result of various factors playing a key role. There was a fall in the value of the exports which was mainly the crude oil, the prices of the crude oil was low and there was much external borrowing. The GDP growth of 2.3% places the economy at the contraction stage in the business cycle. During this particular stage, unemployment rates usually rise and there are many layoffs in the nations’ companies. This translates to a wanting situation where many citizen are faced by economic difficulties. Very limited oil production is one of the reasons for the diming economy in the UAE nation. With a country that heavily relies on oil production to earn foreign exchange, then a dim in the production of that crud e oil will mean a lesser growth in the economy since only little capital will be available for the nation`s authorities to fund the projects that drive the nation`s economy. Secondly, the nation borrowed much from the outside donors. The IMF established that the nation borrowed a lot of capital form the international donors to fund state owned projects that result to nation being driven into an ever maturing external debt of around $12 billion. When a lot of capital is borrowed from the international monetary donors, the accruing interests normally make the economy suffer certain setbacks if the funded projects take long time to payback. Therefore, it is the duty of every world nation to limit the amounts of capital that can be sought internally to fund projects domestically. If external borrowing is not controlled, then the nation`s economy can be at risk of collapsing when the debts exceed the earnings and such a nation`s economy can proceed after being bailed out. Therefore these two factors have been substantial to place the UAE`s economy at the contraction stage in the business cycle. Contraction fiscal policy The authorities of the United Arab Emirates government have adopted a fiscal policy whose sole aim is to cushion the economy from a further decline in the future. A fiscal policy can actually be described as the process whereby a government or authority changes the levels of taxation on goods, services and other taxable entities, controls the levels of government spending with the sole aim of influencing the aggregate demand (AD) so as to result in the most favorable level of the economic activity in the country. The UAE government should formulate and undertake a fiscal policy to cushion the nation`s economy. Basically a fiscal policy has been established to keep the rates of inflation low and secondly stimulate the country`s economic growth with a certain period of time and stabilize the economic growth by preventing the economy of boom and bust cycle. The United Arab Emirates should undertake the contractionary fiscal policy. Contractionary fiscal policy can be defined as the policy whereby the authorities or rather the government decreases its purchases, increases some taxes and decreases the money transfer payment with the aim of correcting the inflationary problems of a working business cycle in today’s business realm. This particular fiscal policy closes an inflationary gap which then restrains the economy which in turn realizes a decrease in the inflation rate. In a developed economy such as that of the United Arab Emirates, a contractionary fiscal policy can be employed to stimulate economic development in the nation. We all know that a fiscal policy affects directly the aggregate demand of any economy. Aggregate demand as we all know is the total number of final goods and services in any particular economy. They include the government spending, nation`s consumption, the investments and the net exports from the nation. When the government decreases the spending, this act directly affects the aggregate demand curve whereby there is a decrease in demand for goods and services by the government. Reduce in government spending reduces pressure on the economic resources of the country which results in the average price levels coming down. This cushions the citizens and stimulates economic growth since many citizens will afford to buy many goods and services as much as possible. When this particular fiscal policy is undertaken, then the inflation gap will be small to be noticed by the country residents. There will be very small numbers of unemployment since many companies will be able to pay their salaries since the prices and the many raw materials used in the industries will be affordable to purchase. The service industries will stand a chance of offering many services since the numbers of the customers will be large enough. Therefore we can indeed notice how the contractionary fiscal policy will be important to the nation if it is implemented. The expansionary and contractionary fiscal policies have direct impact on any country`s economy. It should be noted that in an expansionary fiscal policy, the government is much interested in spending and reducing the taxes whilst the contractionary fiscal policy entails cutting the unnecessary government spending and raising some taxes. An influx of debt securities by the national government has direct effects on the interest rates and the asset prices through out the nation. The private entities that are practicing business are actually forced to increase their savings to realize their dream of purchasing the government debt which in turn raises the real interest rates. When the interest rate increase, it becomes difficult for the small based business companies and people to obtain the loans. Notably, a decrease in a government borrowing normally results in more capital for the private investments. It is noted that there will be less pressure on the interest rate of the loans especially for the category of the small borrows. Therefore less borrowing and spending by the national government translates to fewer taxes creating an ever increasing pool for the available capital funds for the private markets. Finally if the government contractionary fiscal policy results in surplus, then the nation’s authority acts as a creditor rather than a debtor Macroeconomic indicators Macroeconomic indicators can be defined as the actual statistics that are used to indicate the current status of an economy of a country with regard to a certain entity of an economy such a labor, the markets or even the trade. These macroeconomic indicators are normally published at certain time both the government agencies and the private sector to offer information about the investment opportunities. The employment and the nations output or rather the exports are some of the macroeconomic indicators of an economy. It is very true that the GDP growth of UAE was 4.9%in 2011 but dimmed to 2.3% in the following year which is 2012. A dim in the national growth is likely to affect the two macroeconomic factors. The unemployment of the citizens is likely to rise because the purchase of various assets such as industries is likely to get to lower levels. The numbers of investors willing to invest in the country are likely to lower due to unfavorable economy. The unemployment rates will definitely rise. Employment is an indicator of how healthy the economy is in the business cycle. It is actually a measurement of the inflation rate in a country. Therefore the decrease in the GDP growth from 4.9% to 2.3% resulted to a rise in the unemployment levels. Every nation across the globe earns foreign capital through the sales of export which are either the goods or services. From the article we note that ere is limited potential for an increase in the production and sale of crud oil from the nation in the near future. This simply means that the government will have limited money to fund projects locally and may result international borrowing which in turn has adverse effects on the nation GDP growth. Therefore we can conclude that the crude oil export from the country is likely to lower due to increased costs of production. Conclusion We can conclude that the GDP growth is a key indicator of how well an economy is performing. A high GDP growth means that the economy of the country is performing very well, the prices of goods and assets are low, inflations rates are minimal whilst when the GDP growth rate is small in the ranges of 1% to negative, then unemployment rates are high, very few investments are made into the country and the government of that nation relies heavily on foreign borrowing. References Röger, W., Székely, I. P., & Turrini, A. (2010). Banking crises, Output Loss and Fiscal Policy. London: Centre for Economic Policy Research. Kaminsky, G. L., Reinhart, C. M., Végh, G. C. A., & National Bureau of Economic Research. (2004). When it rains, it pours: Procyclical capital flows and macroeconomic policies. Cambridge, Mass: National Bureau of Economic Research. Alzoubi, O., & Texas Tech University. (2004). Essays in monetary and fiscal policy. (Dissertation Abstracts International, 65-3.) Reuters, 2016. Reuters.com. Retrieved 26 April, 2016, http://www.reuters.com/article/2012/03/14/imf-emirates-economy-idUSL5E8EE6CY20120314 Read More