Can Dubai get quickly back to growth again?

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Yesterday this blog explored the emerging market business cycles as suggested by Dr Marc Faber in his book ‘Tomorrow’s Gold’ and saw Dubai situated in phase five and entering phase six.

The real dilemma is looking forward to the next phase: phase zero. The last time Dubai came anywhere close to this phase was in 1999 with oil prices at $10 and local stock prices on the floor, at the tail-end of the Asian Financial Crisis.

The fear at that time contrasted with the much more modest business slowdown of 2000, and a quick resumption of growth back through the business cycle to our present position. Will it be the same again this time?

Phase zero

Certainly a long phase zero is a nasty business. Dr Faber identifies its characteristics as: flat per capita income; high unemployment; low capital spending; domestic instability; falling profits; capital flight; no foreign investment; hotels empty; stock market at a bottom base; stocks very undervalued; press very negative; credit tight; Swiss bankers give up.

Oil economies are perhaps a little different to this general model for all emerging markets. Capital spending is generally sustainable, and an exit of foreign guest workers leaves less scope for internal unrest.

Indeed, what is needed to quickly exit phase zero is also available. Dr Faber says it needs a ’spark’ or ‘catalyst’ to start the recovery cycle. For oil economies an upturn in oil prices is the usual catalyst, although the long stretches of low oil prices in the 80s and 90s should not be forgotten.

However, if you believe in a commodities super-cycle that began around 2000 then today’s oil price crash should not last long. The supply and demand economics of oil favor a higher price to encourage more oil exploration to replace dwindling reserves, which must sooner or later impact price levels.

Oil is king

It should be no surprise to realize that recovery prospects in the region depend on oil prices. Dubai, as the regional logistics, commercial and financial capital takes about six months to feel an upturn in oil prices as it feeds through the orders pipeline.

But will the world’s economy get quickly back on its feet? That is a far more difficult question to answer. Clearly if that took several years, and not just until Q3 as some hope, then it would be bad news all round.

However, the global stimulus packages look hugely reflationary, and oil prices would surely be one of the first signs it was working. That would make buying assets associated with oil economies at this time a wise move, especially for those who can afford to wait a while.