What does a double-dip recession hold for the Oil States?
Posted on 02 July 2009 with no comments from readers
It is now increasingly apparent that the green shoots of recovery have been half down to a liquidity boost from governments, and half down to wishful thinking and talking.
The immediate cause of a swing back into the gloom and doom of late last year is likely to be the rising oil price. Oil above $70 is every bit as damaging to the global economy as oil at $147 was last summer before the global economic crisis.
Gloom returns
Not that the evidence of a recovery has ever been that strong. Yesterday the US posted a seven-month low for mortgage applications and the loss of 473,000 private sector jobs in June. US consumer confidence has also fallen again and the savings rate of 6.9 per cent is well on the way to the double-digits predicted by pessimists.
German engineering orders plunged by 48 per cent in real terms in May, although UK manufacturing and service sector output fell at its lowest rate for six months. Japanese business confidence remains on the floor.
Surely it is not going to take very much to tip this gloomy reality back into another slump, with reality shining through the upbeat talk from analysts and politicians. The obvious indicator will be renewed stock market weakness, a rally in bonds and the dollar and a fall in commodity prices including oil, with gold perhaps largely escaping as a safe haven asset.
Quick recovery?
Where will this leave the Oil States? If the downturn of last autumn is any guide then oil prices could turn back up again quickly, particularly if governments rush to inject money with another round of stimulus packages. That looks very likely as the alternative of debt deflation is too horrible to contemplate and so easy to predict.
So while Gulf stock markets could take a further tumble in a major financial crisis this autumn, and presumably any summer sell-off will be more mild, then this could mark the bottom for local stock markets and business activity, and possibly even the bombed out real estate sector.
Thereafter an oil price rally would quickly restore local liquidity and begin a slow but sustainable recovery in the region. Whether this will be enough to keep many small and medium sized businesses from succumbing to the fate of bluebanana.com or the fleeing computer sellers or real estate developers remains to be seen.
