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Creation Date: Tue, 31 Mar 2009 GMT

UAE faces 1.7% deflation owing to expat exodus

Property prices, rents and demand for good plummet as report predicts UAE population will fall by 16% from 2008 levels this year

The UAE economy will shrink by 1.7% this year, due mainly to the volumes of expats leaving, a report has said.

The findings from EFG Hermes, the largest invest bank in the Middle East, suggest that workers in the construction industry are leading the exodus alongside financial sector employees. Their departure is leading to falling property prices, rents and demand for goods and services. Property prices have slid this year to just 40% of peak levels in 2008. For example, four-bedroom garden homes on the Palm Jumeira are going for £1.2m compared with £2.6m in July last year.

Expats comprise 80% of the UAE's population and are leaving in droves as the global recession sparks job losses and cancelled developments - some $400bn of construction work is on hold in the UAE, according to research firm Proleads. EFG Hermes estimates that the population will fall by 5.5% this year, including a 17% drop in Dubai. It means the number of people living in the UAE would fall from 1.79m in 2008 to 1.49m this year. There will also be a 30% decline in the number of construction and financial sector workers.

The deflation forecast contrasts sharply with the 7.4% growth that the UAE achieved during 2008. EFG Hermes has downgraded its forecast in January for the UAE, which predicted the economy would contract by only 0.04%.