Are we safe from another global recession?

Global recession is more likely today than an extended period of sluggish growth and high unemployment rates, Bill Gross, founder of Pimco, the world’s largest bond fund, wrote yesterday in his comments sent to 'Emirates24|7'.

Since 2009, Gross has said the US and other developed economies were entering a period of what he terms “new normal,” a period marked by lackluster economic performance but still one of growth. Now, he says things might have taken a turn for the worse but assures that we’re still not past the point of no-return. “…[S]overeign balance sheets resemble an overweight diabetic on the verge of a heart attack. Still, if global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible,” Gross wrote in his monthly investment outlook. 

The UAE may not (yet) be faced with the prospects of a second recession, but most residents in the country seem unsure about their future prospects given the turmoil in the Eurozone and the crises that a Greek default can trigger.  Many believe that property demand may dampen further and their jobs may not be safe again. Two in five (44 per cent) employees working in the UAE fear losing their job with increased stress levels as a result of the economic downturn, according to a poll run by this website, indicating that consumer confidence may be dwindling.
However, economists and experts believe that the situation in the region may not be a repeat of what we’ve seen in 2008.

Recently, Sheikh Ahmed bin Saeed Al Maktoum, Chairman of Dubai’s Supreme Fiscal Committee, said local banks have sufficient liquidity to weather a global downturn. “[Local banks] have lots of cash and lots of liquidity as well,” Sheikh Ahmed told reporters on Monday.  “We’re not directly affected [by Europe] but I'm sure some [foreign] banks which are here could have certain issues. But the world will never be with no crisis,” he was quoted as saying.

“Another recession has not begun yet. But there is a fear that there is one round the corner,” MR Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz) told this website. “There is no doubt that the global economy is already slowing down, but the degree of the slowdown will depend on how events come to unfold in the Eurozone,” said Giyas Gokkent, Group Chief Economist at National Bank of Abu Dhabi (NBAD). 

“The Gulf is well positioned to meet challenges in the sense that bank capital buffers are very high and fundamentals of the sovereigns are quite strong. There has already been significant price adjustment in the real estate sector. Citing the reasons behind his outlook, he added: “We do not currently have contraction in regional economic activity in our basecase forecasts, but this is reviewed monthly depending on the oil price outlook in particular. The long term outlook for commodities is positive. The pattern for slowdowns tends to be a dip and subsequent bounce as a result of a number of factors such as built-in automatic stabilizers in the global economy such as a reduced burden of taxation and energy price movements. 

“I do not see a 1930s style depression at this time because widespread bank failures, closures, and money/deposit destruction would have to occur for that type of scenario. Central Banks and governments will do everything in their power to avert a systemic banking sector failure.”
But there are many ways in which the troubles in the West can affect us. According to Gokkent, “there are multiple channels through which GCC economies could be affected.”

“One direct linkage is through the price of oil. Dubai spot is now at $97.9 per barrel, significantly off from its highs earlier in the year. Lower oil prices impact trade and fiscal balances adversely in the region. While the current level for the price of oil is still fine for regional economies, the fiscal breakeven oil price is higher across the region. For example, IMF estimate for fiscal breakeven in Saudi Arabia in 2011 is $80 per barrel. In the event that oil prices soften sharply, then OPEC would presumably cut production to support prices; i.e; a double impact with lower oil price and lower output.

“The financial sector is another channel through which there would be an impact. Banking sector liquidity would tighten with repercussions on economic activity; cost and availability of credit would be affected. 

“Declines in asset prices would create a negative wealth effect discouraging expenditures by households. Uncertainty about the job market would further weigh on household expenditure. Firms would rein in expansion plans given uncertain demand growth. Overall economic activity would therefore suffer,” he explained.

Last is the exchange rate which could impact the economy in the region. “Exchange rate is another channel through which there would be an impact. Dollar strength appears to go hand in hand with rising global risk aversion. A stronger dollar is negative for commodity prices and this is one element explaining a lower oil price. A stronger dollar, and therefore local currencies, is generally negative for non-oil economic activity,” added the NBAD economist.

Raghu believes that even though we may not be in a recession but globally the revision of growth numbers is a worrying factor. “The recent World Economic Outlook report by IMF expects global growth to moderate to about 4 per cent through 2012, from over 5 per cent in 2010. Real GDP in the advanced economies is projected to expand by about 1.9 per cent in 2012 and emerging markets to  grow by 6 per cent in 2012. Hence, technically we are not seeing another recession yet,” he stressed.

“However, what should be noted here is the sharp revisions to the growth numbers by IMF in a space of three months. Within three months, the growth outlook for US has come down by 1 per cent. The main problem is the lack of private demand due to tight bank lending, a phenomenon that we can easily notice even in GCC,” he added.

According to him the problem lies in the two biggest economies of the world. “Recovery will not happen unless two important things happen. The locomotive of world economy, i.e., US should learn to depend less on domestic consumption as a single most important factor for growth and depend more on exports backed by increasing productivity. On the other hand the lion of all emerging markets, i.e., China should learn to depend less on exports and take measures to grow by stimulating domestic demand. And both are very much possible. If the US and China adopts this course, they can easily remove the imbalance that is log jamming the growth today.

“Recessions are part of business cycles and hence they need not be feared. But the governments should anticipate them wisely and provide policy measures that can reduce the pain. The collateral damage to the Gulf will be via lower oil prices. Job losses may not be a big issue here,” he added.

In the run-up, though, we have seen gold prices plummet 15 per cent last month as confused investors look for safe havens to preserve their wealth in these troubled times. “The trouble is that, as investors search for safe havens, no one is immune,” said Gerard Lyons, Chief Economist and Group Head of Global Research at Standard Chartered Bank.

“In an era of globalisation, problems in one part of the world soon spread elsewhere. Before the crisis in 2007, Asia and other regions such as Latin America and the Middle East were not decoupled from events in the West, but they were better insulated. This allowed them to rebound strongly, helped by high reserves and sound fiscal positions. Now, they are still not decoupled from the crisis hitting the West, but they are more diversified and better able to cope,” he said.

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