THERE is no longer any question that activity in the UAE economy is now growing more slowly than over the last two years. The economy was given a boost by high oil prices and higher production volumes during the Kuwait crisis but the impact of that windfall is now fading. Having ridden out the crisis by emphasising how far it was from the danger zone, the UAE then capitalised on the peace by stressing how close it was to the reconstruction market. Trading and domestic construction activity boomed. After expanding by less than 1 per cent in 1991, gross domestic product (GDP) grew by 3.08 per cent in 1992. Provisional central bank figures for 1993 show the growth in GDP slowing to 1.15 per cent.

Within the positive growth rates, the non-oil sector is expanding the fastest. Fittingly for a country that is the region's leading trading post, transport and communications have been expanding strongly. But after a surge of nearly 7 per cent in 1992, growth in this sector was back to a more modest 3.1 per cent last year. The growth rate in two other very active sectors - real estate and construction - also slowed to 3.7 per cent and 4.1 per cent, respectively. Both sectors exhibited strikingly strong growth in 1992 when the recent boom was at its peak.

The oil sector contribution to GDP is shrinking and dropped below 40 per cent in 1993. Analysts agree that the non-oil sector is likely to perform better than the oil sector in the years ahead. But, oil earnings are still the motor that drives the economy and the spending capacity of the federal and emirate governments will eventually reflect the downturn in prices.

Government spending has been substantial over the past two years. In Abu Dhabi, a programme to boost oil production capacity to about 2.6 million barrels a day (b/d) is now well-advanced. Costing about $5,000 million, it should be completed by 1997. There are now doubts about the strength of Abu Dhabi's commitment to a refinery expansion and a petrochemical scheme although analysts believe that adequate funds have already been allocated for their execution. In Dubai, the government has poured funds into new power and desalination capacity, urban amenity projects, and roads and bridges to improve mobility in and around the city and out to the port and industrial complex at Jebel Ali. So far, Dubai has held back from going ahead with the $900 million plan to expand the airport.

The federal budget, frozen for 1994 with spending at about $4,800 million, gives only the barest indication of actual official spending. The emirate governments and their agencies spend far more but publish no figures. Abu Dhabi's annual expenditure is assumed to be much larger than the federal budget. The emirate also earns income from an investment portfolio estimated to be worth about $65,000 million. Local analysts estimate that the government of Abu Dhabi had revenues of about $6,000 million to spend in 1993.

Dubai publishes no information on its oil production and revenues. Industry estimates put current oil output at around 275,000 barrels a day (b/d). There has been a steady decline from 400,000 b/d and a three-year gas reinjection is intended to stabilise the Fateh field which is mature and small by Gulf standards. Without a surprise discovery, Dubai's oil output will continue to decline which is why the emirate is pursuing the development of a non-oil economy so vigorously.

Major project spending across the federation is expected to enter a quieter phase during the course of the year. There is a substantial backlog of infrastructure work, mainly roads and power and water transmission schemes, which will still be tendered in the months ahead but most of the big power and water projects are already under way. In an October 1993 report on market prospects, the US embassy in Abu Dhabi estimated civil works spending over the next two to three years at $8,000 million. Construction of commercial and residential property in the main urban centres continues at a very high level.

In common with the other oil-based economies of the region, the UAE will soon start to show signs of the lower earnings. Prices dropped by 20 per cent during the course of last year and have sunk even lower during the first five months of 1994. To maintain current levels of spending and economic growth, the authorities may have to dip into their foreign assets. Says one Western analyst: 'The reactions in the region to lower oil prices vary according to economic necessity but are not based on a sense of the need for structural change. They see it as a temporary setback to ride out as they did in 1986.'

Dubai has started to articulate an alternative economic strategy but in the absence of indicative data it is difficult to judge the success of the effort. Sceptics contend that the thin margins to be made on the transit trade, tourism and a growing services sector will never provide a substitute for oil revenues. Eventually, a tax system of some kind will have to be devised to augment the minimal municipal fees that are levied at the moment.

Progress to open the UAE economy to greater foreign participation is limited. Only in the free zone at Jebel Ali is full foreign control of a company permitted. Agency and trading regulations are still very restrictive. Access to the oil sector, an area which would be likely to attract considerable foreign investment, is also jealously guarded.

Proposals for a formal stock exchange and an offshore banking centre have been aired. Over the past year, the central bank has tightened its supervision of the commercial banks and it favours the creation of a properly regulated stock market. Dubai believes it has the attributes and potential to develop into an international financial centre but it accepts that the legal and technical framework still has to be developed.

Despite the uncertainties created by softer oil prices, the underlying soundness of the UAE economy means that the demand for goods and services should continue to grow, albeit at slightly slower rates. With fewer federal projects in prospect, the poorer emirates will have fewer chances to emulate their wealthier neighbour in Dubai. Abu Dhabi is so well-endowed as to be virtually immune to the effects of any downturn.