Dubai recovery patchy and slow due to debt, property and global economy

Today there is a big conference in the Armani hotel in the Burj Dubai looking at recovery prospects for Dubai, with many senior business and government speakers. The mood is likely to be upbeat and positive, the reality down on the ground is still somewhat different.

Away from the cheerleaders business is still much tougher in Dubai than 21 months ago before the sudden stop of the global financial crisis. Few expected that bubble to burst when it did, but it was inevitable. No boom last forever.

Legacy of the boom

The problem is that such a long and powerful boom focused on construction and real estate has left a legacy of huge debts and a tremendous upcoming supply of property in a falling market. This is a massive headwind for any economic recovery to overcome to achieve positive economic growth.

The IMF currently still has Dubai locked in recession, albeit struggling to emerge from that euphemism ‘negative growth’. However, while debt restructuring and project consolidations are proceeding, this is not just a matter of Dubai putting its own house in order.

If that were true a return to economic expansion could be confidently predicted, with higher levels of activity in the ports, aviation and tourism compensating for stagnant business for the banks, real estate and construction.

But the global economic crisis ended the Dubai boom, and it is too early to say with any confidence that it is over. If the world goes into a double dip recession – which would be a typical pattern for a global financial crisis of the extreme variety we have just witnessed – then Dubai will also have a second phase of recession, or more correcty will not emerge from the present recession anytime soon.

Double dip recession

Many other articles on this website have debated the liklihood of a double dip global recession. The global economies seem split between those prepared to borrow until there is no tomorrow, and those who feel that tomorrow always comes and that borrowing has to stop.

In the short-term the austerity school is probably strong enough to guarantee a double dip global recession. Then again the high borrowing nations risk a hyper-inflationary future that will be bad for growth, and it may be just as well if some other nations have sorted their debts out by then.

Can Dubai survive and prosper in this troubled global economic environment? Certainly there will still be useful business for the trading hub of the region. But in a world of debt deflation and deleveraging it is hard to see business returning to how things used to be.

Besides Dubai still has its own debt and property overhang to digest before new growth can resume, and that is clearly going to take some time, even if the global scene improves more quickly than seems probable now.