Economy caught in inflation bind

Economy caught in inflation bind
Gulf News Published: July 30, 2007, 23:49

The UAE economy, moving on a high-speed growth trajectory, is getting caught up in the classic growth versus inflation dilemma.

While inflation in the UAE is largely a by-product of excess liquidity, increased government and private spending and the relative supply constraints in the real estate sector, the dirham's peg to the perennially falling dollar is also contributing to the general rise in prices.

Independent economists and the UAE Central Bank have always attributed surging rents as a major contributing inflationary factor. However, rising rents have also been widely acknowledged as a driver behind the real estate boom.

The UAE Ministry of Economy has estimated inflation at 9.3 per cent last year. With the new supply of homes coming into the market this year inflation was expected to ease to about 7.5 per cent.

However, with the surging cost of living and shrinking purchasing power, new supply alone is unlikely to cool inflation. In the absence of any kind of inflation targeting through fiscal or monetary policy measures, it would be unrealistic to expect prices to retreat in the near term.

But if the market is left to find its own tolerance level for too long, it will almost certainly bring down prices but at a huge cost in the form of a severe correction starting in the real estate sector, with cascading effect on other sectors.

The real estate sector is already seeing the omens on the horizon in the form of declining demand for newer properties from domestic buyers.