How long will UAE inflation stay low?
Posted on 10 March 2009 with no comments from readersOrder online from this link
After a couple of years of double-digit inflation, 2009 will see inflation fall to around five per cent in the UAE, predicted minister of economy Sultan bin Saeed Al Mansouri yesterday. But this could only be a brief respite for the country before a new wave of inflation arrives courtesy of US monetary policy.
For the moment a stronger US dollar and falling energy prices, combined with a real estate correction and general business downturn has lowered inflation rates in the UAE. However, the dollar pegged local currency, the dirham, leaves the door open for imported inflation.
Buffett forecasts inflation
On Monday billionaire investor Warren Buffett praised the efforts of the Federal Reserve to stimulate the economy but warned the measures could lead to an inflationary cycle worse than the one that followed the 1970s oil shock.
‘We are certainly doing things that could lead to a lot of inflation,’ said the Sage of Omaha. ‘In economics there is no free lunch’.
After the US stock market crash in 1974 the authorities encouraged a massive wave of inflation to bailout those with large debts, and rebalance the economy, albeit at the cost of lower rates of growth and a massive misallocation of resources. History tends to repeat itself, and there is no obvious policy alternative this time.
UAE boom to return?
All the same, older residents of the UAE might recall that the late 1970s saw a spectacular boom in real estate and infrastructure, and a mushrooming of national wealth.
Could it be that the Obama inflation will fire up the oil price rekindling the recent oil boom in short order?
Oil and gas prices will certainly be a beneficiary of a worldwide inflation. But as HE Al Mansouri points out we are not there yet. The immediate outlook is for a more sobering period of dis-inflation and even deflation for many countries.
Some pundits argue that the pain of the US recession will have to get rather worse before the Fed adopts the more desperate inflationary techniques of printing money, or ‘quantative easing’.
That would leave a tough year or two ahead for the UAE before the cavalry of inflation comes charging over the hill, but then the good times might be back, although the legacy of the real estate boom will weigh heavily on any upturn, however welcome.
no Comments posted by readers:
Peter, The US are already printing money and have reached the max of quantative easing – we are almost zero% at present!
What more can they do and what will these desperate inflationary measures entail?
In your opinion, how long will it take for inflation to kick in? What happened in the 70’s and how long was the cycle back then?
I didn’t get what you meant by real estate leagcy will weigh down on any potenial boom? An inflationary wave should help the Dubai real estate market recover from the current slump…right?
As anyone living in the middle east I’m truly hoping for oil prices to recover at least to reasonable levels of 70-80$….but I think Obama’s energy policies are killing the potential of any future oil boom. When the number 1 consumer is trying as much as it can to reduce its dependence on oil, then we where will the demand come from. I don’t think china’s demand is sufficient
Omar, The US has not started QE yet, only the UK has got that far – but it can not be far off. I can’t tell you what the Fed will do, they probably do not know fully themselves.
Looking back on the 70s I can be more helpful – it was about two years after the crash that inflation came surging through – so it depends from where you date the current policies. I would have thought by the end of 2010 we will feel serious inflation.
By the legacy I mean the oversupply of property – and new property continues to be delivered daily to a falling market (expats are leaving or about to leave). Inflation would help later on by removing the burden of debts on developers and existing house owners but it would also push construction costs back up. Lower rents and lower house prices look inevitable in the current circumstances, and you would need to see a substantial global recovery to see that change. That does not look at all likely does it?
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