If anyone was in any doubt that the recession was going to continue throughout 2010 for Dubai, it will have been dispelled by now. A consensus seems to be forming around the emirate facing a second year of contraction in 2010, although this year it will be a more modest decline of 0.5 per cent, after 2009’s 5 per cent drop.

The International Monetary Fund (IMF) is the latest to table a pessimistic forecast for the emirate. More significantly, the IMF predictions put the UAE as the slowest growth economy in the GCC in both 2010 and 2011.

Dubai’s debt woes coupled with the collapse of the real estate sector continue to hang over the country’s economy. This, along with the anaemic loan growth in the banking sector, which is still risk averse after several regional debt restructurings, will hinder the pace of any recovery.

But that is not necessarily a bad thing. The inflation problem that came to an abrupt end with the bursting of the property bubble was in part caused by the overheating UAE economy. More stable growth would help to avoid that happening in future.

But developing sustainable growth will be a challenge for the UAE and especially Dubai. While trade may have started to recover, the construction and financial sectors that Dubai has relied on so heavily in the recent past, remain firmly focused on other markets.

Abu Dhabi has yet to move from the tendering stage for many of its large spending projects. Future growth will come predominately from Abu Dhabi, and will be oil driven.

The risk is that other markets will be able to close the infrastructure gap while Dubai wrestles with its debt problems and struggles to find new ways to fund development, which will erode the emirate’s competitive advantage in the region.