Course Project A-1

Author: Rida Farid ChoudaryCourse Title: Macro Environment of BusinessDate of Submission: February 12, 2016

1. INTRODUCTION

Economic indicators are a piece of economic data, usually of macroeconomic scale that, is used by investors to interpret the current and future investment possibilities and judge the overall health of economy (Economic Indicator). Economic indicators are often put out by government agencies, nonprofit organizations or private companies.

This project aims to critically analyze and evaluate economy of U.A.E. and to attain an understanding of the impact that the economic indicators have had on U.A.E. There are, of course, many economic indicators released by variety of government agencies and private sources. Each measure differs in popularity in the public view but for the purpose of this project, I have focused on some of the most significant and widely followed economic indicators including Gross Domestic Product (GDP), Population and Unemployment Rate, Inflation Rate, Interest Rate, Balance of trade and Government Debt to GDP.Firstly, the project discusses what the key economic indicators are and what impact do they have on a country’s economy. Further on, the project forecasts the short-term performance of U.A.E. using the data collected in the first phase. The project then discusses the changes in the fiscal and monetary policy of U.A.E. and the impact of those changes on the economy. The project concludes with an overview of how the financial and economic indicators are linked to the economic outlook of U.A.E.

2. DISCUSSION

2.1 Major Economic Indicators There are, of course, many economic indicators released by variety of government agencies and private sources. Each measure varies in popularity in the public view but for the purpose of this project the following indicators have been considered

2.1.1 Gross Domestic Product

Gross Domestic Product is the meeting point of three sides of the economy: expenditure, output, and income. It is a measure of economic activity in a country. If the GDP trend is positive it means the economy is growing where as if GDP is recorded s negative it predicts that the economy is declining.

Figure 1 – Gross Domestic Product (United Arab Emirates GDP)

The economy of U.A.E is a strong economy is progressing continuously. According to the data available at Trading Economics the Gross Domestic Product of U.A.E was recorded for worth USD 399.45 Billion in December 2014. The GDP has increased from USD 253.55 Billion to 399.45 Billion over a period of 5 years has is a positive indicator for the economy of U.A.E.

2.1.2 Population and Unemployment Rate

Continuing population growth contributes to the depressing unemployment figures (Martin). In the United Arab Emirates, the unemployment rate measures the number of people actively looking for a job as a percentage of the labor force. It is usually expressed as unemployment rate.

Figure 2 – Population (United Arab Emirates Population)

As per the data recorded in December 2014, the population of U.A.E. was recorded as 9.45 Billion which has increased about 4.04 % over last 5 years.

Figure 3 - Unemployment Rate (United Arab Emirates Unemployment Rate)

In comparison to the increase in population of U.A.E, unemployment rate of U.A.E. has declined to 4.20 percent in 2012 which was previously recorded as 4.6 percent in the previous year. This decline in the unemployment rate is itself a positive economic indicator for U.A.E. where as if we compare the current unemployment rate to the unemployment of 2007 i.e. 5 years ago, it was recorded as 3.45 hence it can be concluded that the unemployment rate in U.A.E. has drastically increased over a period of 5 year but the government is trying to control this rate.

2.1.3 Inflation Rate

Inflation is the rate at which the level of prices for goods and services are rising and as a result the purchasing power of currency is decreasing (Inflation).

Figure 4 - Inflation Rate (United Arab Emirates Inflation)

As per the data, the inflation rate recorded by December 2015 was 3.60 percent. It can be seen that the inflation rate of U.A.E. has increased from 2007 to 2009 and then declined to – 1.60 in 2011 and then again has increased to 3.60 over next 3 years.

2.1.4 Interest Rate

Interest is defined as the cost of borrowing money or a commodity. This interest is basically the compensation for the risk that the lender has taken by lending the money. It is usually expressed in terms of annual interest rate; the amount of interest paid during one year by the amount of money loaned.

Figure 5 - Interest Rate (United Arab Emirates Interest Rate)

The central Bank of United Arab Emirates has raised its annual interest rate by 25 points in December and currently it has been recorded as 1.25 percent. The interest rate has previously been constant over a period of 5 years and hence this is a drastic increase made by the central bank. The decision of this raise in the interest rate is solely taken by the central bank.

2.1.5 Balance of Trade

Balance of trade is described as the difference between the exports and imports of a country. Balance of trade is one of the most significant components of the balance of payments of a country.

Figure 6 - Balance of Trade (United Arab Emirates Balance of Trade)

The trade record of United Arab Emirate has recorded a surplus of AED 480600 Million in the fiscal year of 2014. The highest surplus rate was recorded back in 2013 when the trade surplus almost reached AED 500000. The trade surplus of United Arab Emirates has recorded a variation in its trend over past 7years. The trade surplus declined from around AED 220000 to AED 150000 from 2007 – 2008 whereas the surplus rose to AED 500000 in proceeding 4 years and then declined again.

United Arab Emirates had been recording such trade surpluses since 2000 and that is mostly due to the export of oil and petroleum products which is 40 percent of the export by U.A.E.

2.1.6 Government Debt to GDP

Government debt is a public or national debt that is owed by the central government. It is often referred as debt of state. Whereas, Gross Domestic Product is the meeting point of three sides of the economy: expenditure, output, and income. It is a measure of economic activity in a country.

Figure 7 - Government Debt to GDP (United Arab Emirates Govt Debt to GDP)

United Arab Emirates has recorded government debt to GDP of 15.68 percent in the year 2014. The minimum Debt to GDP in U.A.E. was recorded in 2001 which equaled 2.70 percent. This percentage has rose over number of years and reached a maximum level of 24.1 percent in 2009. Generally this debt to GDP percentage is used by investors to analyze the country’s ability to make the future payments on the debts it had acquired thus it affects the country’s cost of borrowing.

2.2 Short Term Economic Outlook of U.A.E.

2.2.1 Gross Domestic Product

Figure 8 - GDP Forecast (United Arab Emirates Forecasts)

The GDP of U.A.E. is expected to rise by 2.5 percent in the coming year since the trend shows that after every decline of 3 years the GDP once again get a boom in U.A.E hence the GDP will increase by the end of 2016 as per the expectations of economists.

2.2.2 Unemployment Rate

Figure 9 - Unemployment Forecast

Unemployment Rate in U.A.E is expected to increase in the coming year as per the trend previously followed. According to the economists the unemployment rate will raise up to 4.30 percent in the first quarter of 2016.

2.2.3 Inflation Rate

Figure 10 - Inflation Rate Forecast

Inflation Rate in U.A.E. is expected to be decline in the coming quarter since the trend of inflation rate in U.A.E has been quiet predictive in nature and hence it will fall to a level of 3.50 by 2020 as per the analysts and economists.

2.2.4 Interest Rate

Figure 11 - Interest Rate Forecast

The interest rate in United Arab Emirates is expected to increase by additional .25 percent by the end of this quarter as per the analysts’ expectations at trading economics.

2.2.5 Balance of trade

Figure 12 - Balance of Trade Forecast

According to analysts at trading economics, the Balance of Trade of United Arab Emirates is predictable to be around 480000 Million AED by the end of first quarter of 2016.

2.2.6 Government Debt to GDP

Figure 13 - Government Debt to GDP Forecast

As per the analysis of economists at trading economics, the government debt to GDP percentage of United Arab Emirates is projected to be 19.65 percent by the end of this quarter and 22.32 percent in 2020.

2.3 Effect of changes in Monetary and Fiscal Policy

Monetary Policy is a policy set forward by the central bank of the state. It includes basic annual interest rates and influencing supply of money. Whereas Fiscal Policy is set forward by the government and decides upon the level of government spending and taxation levels, balance of trade and payments. When the government decides to increase the amount of debt during expansion of its fiscal policy, the upcoming generations have to face the higher tax in order to pay the interest due on the government whereas the benefits are received by the current generation. Hence the economy is negatively affected whereas at time when the central bank increases the annual interest rates, it affects the firms’ and peoples’ demand of goods and services mainly due to the alteration in the borrowing costs e.t.c. Since the Central bank of U.A.E has increased the interest rates, the cost of borrowing will increase hence the people and firms would decrease their demand of specific products.

3 Summary After studying the key economic indicators of U.A.E it can be seen that the economy of U.A.E is rather a strong economy. It is rather one of the Gulf countries with highest GDP which is yet predicted to increase in the short-term outlook as per the economists. On the other hand, the unemployment rate is U.A.E is also declining and would further decline by the end of 2016 which again is a positive indicator followed by an inflation rate of 3.6 which has decreased in comparison to the past 5 years.

The balance of trade surplus of U.A.E is mostly due to its oil and petroleum exports which make 40 percent of its total exports. This Surplus is currently recorded as 480000 Million AED and has been predicted to increase in future.

The government debt to GDP ratio of U.A.E has also declined hence among 6 major economic indicators, U.A.E. has scored positive of 5 indicators whereas the Interest rate score for U.A.E is negative since the central bank of U.A.E has increased the interest rate drastically by basic points 25 and this is further predicted to increase in the coming quarter by 25 more points hence making it 1.50.

After critically analyzing the economy it can be summarized that the monetary and fiscal policies of U.A.E are going hand in hand hence improving the overall economy of U.A.E. The central bank of U.A.E should focus on controlling the interest rate so that U.A.E could further enjoy the boom of its economy.

Bibliography

Economic Indicator. (n.d.). Retrieved February 10, 2016, from Investopedia.com: http://www.investopedia.com/terms/e/economic_indicator.asp

Inflation. (n.d.). Retrieved February 10, 2016, from Investopedia: http://www.investopedia.com/terms/i/inflation.asp

Martin, R. (n.d.). Population Matters News. Retrieved February 10, 2016, from Population Matters: http://populationmatters.org/2012/population-matters-news/uk-population-growth-contributes-rising-unemployment/

United Arab Emirates Balance of Trade. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/balance-of-trade

United Arab Emirates Forecast. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/forecast

United Arab Emirates Forecasts. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates

United Arab Emirates GDP. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/gdp

United Arab Emirates Govt Debt to GDP. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/government-debt-to-gdp

United Arab Emirates Inflation. (n.d.). Retrieved February 10, 2016, from Trading Ecoomics: http://www.tradingeconomics.com/united-arab-emirates/inflation-cpi

United Arab Emirates Interest Rate. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/interest-rate

United Arab Emirates Population. (n.d.). Retrieved Februray 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/population

United Arab Emirates Unemployment Rate. (n.d.). Retrieved February 10, 2016, from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/unemployment-rate