Dubai’s economy will shrink by 0.4 per cent in 2010 meaning the emirate will stay in recession for a second year after shrinking 5 per cent in 2009, according to the latest forecast by UAE-based Shuaa Capital.

The bank is forecasting that the UAE as a whole will come out of the recession in 2010, with growth in real gross domestic product (GDP) of 2.5 per cent. The overall growth will be driven by Abu Dhabi’s economy, which is forecast to expand by 4.1 per cent in 2010 following a contraction of 2.7 per cent in 2009.

The continued shrinkage of Dubai’s economy will be driven by a 3.6 per cent fall in the emirate’s population, following a 9 per cent drop in 2009, according to Shuaa.

Mahdi Mattar, head of research and chief economist at Shuaa, says that a continued slowdown in construction and real estate will weigh on the economy. He predicts that Dubai will recover in 2011 with growth of around 3.2 per cent driven by tourism, logistics and the financial services sector.

Inflation in the UAE will be 1-2 per cent in 2010, although Dubai is expected to see further deflation, with prices falling by 0.5 per cent in 2010 following the 6 per cent drop in 2009.

Shuaa is predicting that real estate prices in Abu Dhabi will increase by around 10 per cent in 2010 after falling about 25 per cent in 2009, and in Dubai they will fall by a further 10 per cent after falling by nearly 60 per cent in 2009.