Oil prices boost Gulf business confidence

What a difference a doubling of the oil price makes to business confidence in the Persian Gulf. HSBC’s latest quarterly index shows a recovery of nearly five points to 79.4, against the base level of 100 set in the first quarter of 2007.

HSBC described the results as ‘cautiously optimistic’ but managed to refrain from referring to green shoots of recovery.

Seeing the light

‘Business has been through a tough nine months, but some market participants are now seeing light at the end of the tunnel,’ commented Tim Reid, co-head of Global Banking HSBC Middle East, the largest regional international bank.

‘The mood would appear to be that, while there remains much to be cautious about, things do not appear to be deteriorating. It is a far cry from the boom time of early 2008, but most believe the worst is over.’

The UAE was not the most optimistic of the GCC states, that honor went to Oman, up from 78.1 to 86.6 with the emirates more cautious and up only from 57.9 to 65.9. This is perhaps to be expected as the UAE is the most open and globalized GCC economy and was therefore the most vulnerable to a global economic contraction.

However, the report contained some negative messages, notably that 17 per cent of the 1,823 respondents were pessimistic about revenues, while 35 per cent thought the slowdown would continue for at least two more years.

Business confidence has a mixed record as an economic indicator. A year ago business leaders would hardly have forecast last summer’s plunge in oil prices and the crash in autumn orders, for example, and yet it happened anyway.

Oil price rally

Indeed, it is hard to get away from the conclusion that the rally in oil prices this year almost entirely explains this higher level of business confidence. That is entirely reasonable as the oil price is a good lead indicator of better orders within six months.

But the oil price could also prove vulnerable again, particularly if the global economic recovery proves to be largely an illusion and oil prices plunge again. It is also entirely possible that the massive global stimulus and bank bailouts have produced a temporary boost to an otherwise still deteriorating economic situation.

In the meantime, the mess left behind by the bursting of the six-year oil boom remains to be cleared up, with properties half-built, big debts to be serviced and trade and tourism down. It is good that confidence is returning but full economic recovery is someway off, although it might be closer in the GCC than in the rest of the world.