The UAE will be the worst hit of the GCC states in terms of growth in 2009, but its exposure to the global economy, combined with the government's considerable fiscal resources, will help it stage a strong recovery in 2010. We have revised our UAE growth forecasts down since our previous Business Forecast Report, now anticipating a contraction of 2.8% in real GDP (compared with our previous forecast of 1.7%). As before, the export sector, consumer spending and gross fixed capital formation are the main culprits, partly mitigated by a strong expansion in government spending and a decline in imports. We maintain our view that the economy will bounce back in 2010 thanks to a pick-up in oil prices, long-term government investment in infrastructure (whose effects will be felt well into the next decade), the return of private investor confidence and a resumption in consumer spending growth. We see GDP expanding by 4.2% in 2010, rising to almost 5.0% in 2011.

The UAE remains cautious in its dealings with Iran. Although the two countries have an unresolved territorial dispute, the UAE is reluctant to overly criticise the regime and risk disrupting its valuable trading relationship. The UAE faces a dilemma in its reaction to the recent political unrest in Iran. On one hand, the two countries have something of a tumultuous relationship, with Iran's occupation of islands in the Persian Gulf claimed by the UAE being the main source of tension. Furthermore, like many of its Arab neighbours, the UAE is nervous of Iran's regional political ambitions, and would surely prefer a more pro-Western regime in Tehran, less determined in its pursuit of nuclear technology. Yet the UAE's handling of its relations with Iran are complicated somewhat by the presence of a large and wellestablished Iranian community, while overt criticism of the regime's handling of post-election protests would expose the UAE to obvious charges of hypocrisy, given that its own political system is even less democratic than the Islamic Republic's.

The UAE's stance so far has certainly erred on the conciliatory side. While Saudi Arabia has maintained a stony silence towards the Islamic Republic, the UAE was quick to congratulate Mahmoud Ahmadinejad on his re-election, even as protests against his suspiciously large margin of victory were erupting in Iran.

With demonstrations having now largely died out, it appears to be business as usual as far as the UAE is concerned, with the ruler of Ajman (one of the seven Emirates that make up the UAE) receiving the Iranian ambassador on June 29. The meeting reportedly focused on bilateral trade and economic relations between the two countries, with the ambassador praising the UAE's lack of intervention regarding the election outcome.

The UAE maintains a brisk arms trade, underpinned by regional insecurity, a large budget and a willingness to spend on military hardware. Its armed forces are small but technologically sophisticated and the country rivals the regional dominance of Saudi Arabia and Iran. Procurement remains a high agenda item for the armed forces in the UAE. Deficit spending, on the rise in the Emirates in recent years, indicates that defence procurements will not suffer from a downturn in the local economy. Regional tensions fuelled by an ongoing US presence in the Gulf, and uncertainties in both Iraq and Iran, will also stimulate brisk arms trade in the UAE in the medium-term. Most recently, in March 2009, the UAE announced some AED18.4bn (US$5bn)-worth of contracts at the ninth IDEX defence exhibition in Abu Dhabi.