Restoring GCC growth depends on oil price outlook
Posted on 06 April 2009 with no comments from readers
It is such as obvious truism to associate economic recovery in the Gulf States with the oil price that it might be thought hardly worth noting. However, after the hot-air of the G-20 summit there is good sense in remaining grounded in fundamentals.
Even the diversified UAE economy is driven by hydrocarbon prices as a service centre for the region, and a time-lag of six months between a change in the oil price and the local economy is a fact of life.
Indeed, the collapse in energy prices from $147 last July has taken the GCC economies by surprise and could leave them all in recession this year. Real estate and auto sales have crashed, while even consumer staples are in an inventory cycle squeeze.
Quick recovery
Optimists say that this is a nine-month phenomenon. But they are living on another planet to the rest of us. The economic contraction in major global economies in 2009 will be far worse than anything seen in 70 years, and that is not an atmosphere for an oil price recovery.
In fact oil prices look a little high at around $50 a barrel. Markets usually correct to below their long-term average and that is around $25.
That is not the only bad news. Oil price corrections have a pattern of a big fall followed by several years of very modest upside. In the biggest global recession in two generations this pattern is likely to be exaggerated to the downside, not the upside.
This is not the end of the world for the Gulf States. But it should be seen as the beginning of a new era. The hope that GDP growth will quickly return to the boom years looks foolish.
Suicide plan
It will also be suicidal for businesses that bury their heads in the sand, and carry on as usual waiting for an upturn. Cash balances will be burnt up, even in healthy businesses, and this will end in tragedy.
The model to follow is Microsoft which has publicly stated that it is downsizing to an appropriate size for a smaller global market. Holding out for an oil price recovery that looks very unlikely in the short or medium term is not a sensible or realistic approach to take.
Companies that are railing against their bankers for restricting their business plans might, therefore, have cause to thank their bank managers in due course.
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