The United Arab Emirates is a leader in economic diversification across the Gulf Cooperation Council (GCC), but even the UAE is struggling to grow. The post-2014 lower oil-price environment continues to weigh down economic activity across the Gulf states. Tanker threats and tensions in the Persian Gulf may exacerbate already sluggish non-oil and private sector growth, making economic interests a motivating factor in possible Emirati de-escalation talks with Iran.

Oil is still king in the economies of the GCC states, and even its most diversified members take heed at a threat to their primary source of economic activity. There has been little silver lining to the increasing political risk in the Persian Gulf, as oil prices have been stubbornly low. Diversification efforts combined with fiscal reforms of reduced subsidies of fuel and electricity, new taxes and fees have failed to counterbalance the decline in oil revenues. The softer side of Gulf economies, non-oil GDP, is dependent on foreign investment, tourism and expatriate labor and is especially sensitive to political risk. The result is a stalemate in which diversification efforts lag and oil dependency deepens, but oil is even less reliable as a long-term economic growth strategy.

While oil prices have somewhat rebounded from a recent low point in December 2018 at $50 per barrel, “lower for longer” is the mantra, with prices not reaching above the $75 barrel range in 2019, despite significant regional political tension. Budget deficits continue to be the new normal across the GCC, averaging about 5% for 2019, with the same forecast for 2020, according to CEIC Data and HSBC research.

It has been good news then that Abu Dhabi’s real GDP grew 5.7% year-on-year in the first quarter of 2019, though all was due to the oil sector, according to research by EFG Hermes. The non-oil economy in Abu Dhabi, however, continues to contract. Weak job growth, lower foreign tourist arrivals and a slow hospitality sector have hit the emirate hard. While the slowdown in the property market in Dubai has attracted media and investor attention, the capital economy to the south is also weak and struggling to calibrate its foreign policy objectives with the realities of global oil markets and its stated goals of becoming a diversified economy.