UAE faces brief downturn before energy rebound

UAE economic growth is expected to slip into a mild contraction in 2026 as the Iran war disrupts oil exports through the Strait of Hormuz, before staging a strong recovery in 2027 on higher crude and gas production, major energy projects and continued strength in non-oil sectors.

The projected setback marks a sharp reversal for the Gulf’s second-largest economy, which has spent the past decade reducing its reliance on hydrocarbons through expansion in trade, tourism, aviation, logistics, finance, real estate and digital services. The immediate pressure, however, is coming from a fall in export volumes rather than domestic demand, as the closure of the key shipping artery has constrained the movement of crude from Gulf producers to global markets.

The Strait of Hormuz remains one of the world’s most sensitive energy corridors, carrying a large share of internationally traded crude and liquefied natural gas. Any extended disruption affects not only oil producers but also import-dependent economies across Asia and Europe, where refiners, utilities and industrial users face higher costs and uncertain delivery schedules. For the UAE, the impact is partly cushioned by export infrastructure at Fujairah on the Gulf of Oman, which allows some crude to bypass the strait, but available capacity does not fully offset restrictions on Gulf shipping lanes.

The contraction expected in 2026 is therefore concentrated in the hydrocarbon side of the economy. Lower export volumes reduce oil-sector output, government revenue and external surpluses, even if elevated crude prices provide partial compensation. Stronger oil prices can support fiscal balances, but they cannot fully replace lost barrels when shipping routes are constrained and production is adjusted to reflect weaker export capacity.

The non-oil economy is expected to remain comparatively resilient. Dubai’s trade, aviation and tourism sectors continue to benefit from its role as a regional services hub, while Abu Dhabi’s investment drive in manufacturing, clean energy, artificial intelligence and advanced technology is helping diversify growth. Population inflows, infrastructure spending and business formation have supported consumer demand, housing activity and financial services, although higher global energy prices and supply-chain disruptions may raise costs for businesses and households.

A sharper rebound is forecast for 2027 as energy flows normalise and the UAE advances projects designed to lift crude production capacity and expand gas output. Abu Dhabi has been working towards a crude production capacity target of 5 million barrels per day by 2027, supported by upstream investment, drilling expansion and development of onshore and offshore fields. Higher crude output would also increase associated gas production, strengthening domestic supply for power generation, industry and petrochemicals.

Gas has become a central part of the UAE’s energy strategy. Rising electricity demand, industrial expansion and the growth of energy-intensive sectors such as data centres and advanced manufacturing have increased the need for reliable domestic gas supplies. Expansion at major gas fields, investment in sour-gas processing and liquefied natural gas projects are intended to reduce import dependence and support long-term export capacity.

The Iran war has also accelerated the strategic value of alternative export routes. Fujairah has gained importance as a storage, bunkering and export centre outside the Strait of Hormuz, and pipeline capacity to the port has become a key element of national energy security. Additional investment in route diversification would reduce exposure to maritime disruption and strengthen the UAE’s position as a reliable supplier to Asian and European markets.

Public finances are expected to remain stronger than those of many oil exporters, supported by sovereign wealth assets, disciplined spending and broad revenue sources. Abu Dhabi’s balance sheet gives the federation room to sustain capital expenditure even during a short downturn, while Dubai’s service-led economy provides a separate growth engine. The policy challenge will be to manage inflationary pressure, protect logistics flows and maintain investor confidence during a period of regional uncertainty.

External balances are likely to narrow in 2026 as oil receipts soften, capital inflows ease and import costs rise. Even so, the UAE’s banking system remains well capitalised, and its role as a financial and commercial centre could attract capital seeking a stable regional base. The dirham’s peg to the US dollar provides monetary stability, though it also links domestic interest-rate conditions to US policy at a time when global inflation risks have returned.