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Top-tier analysts have now diagnosed that the US crisis is no longer just a symptom but is in fact experiencing an actual state of a recession. These same experts, however, forecast that the GCC would stand the test of time.
“We’re already there. It’s very funny because recession happens every six to nine years, and every time it happens the people are surprised,” Adrian Slywotzky, managing director of Oliver Wyman, a global management consultancy, told Emirates Business.
He said only the companies that anticipate recession by changing their cost structure are likely to do well.
“But the majority of companies don’t think that way,” he added. “Only around 10 or 12 per cent of the companies do that so they are always the ones that gain market share and competitive position during a recession.”
Slywotzky – named one of the six most influential management thinkers by Industry Week and one of the top 50 business thinkers by The Times of London – said the Middle East is very well positioned to walk through the spur of recession.
“The region is not only positioned to survive but it is also poised to do well because of the diversification of its industrial base,” he said.
Edward Morse, managing director and chief energy economist of Lehman Brothers concurs, saying the Middle East countries are still left untouched by the crisis.
“The US may well have entered into recession but we think it will be over by the end of 2009,” Morse told Emirates Business on the sidelines of a risk management conference in Dubai.
“Recession is not affecting it [the region] at all at the moment, other than providing opportunities for new investments,” he added.
Morse said the amount of free cash in January for investment was over and above the current infrastructure requirements.
“Saudi Arabia has over a $2 billion [Dh7.3bn] a week and what do you do, what do you expect? Here, the holders of credit marry with entrepreneurial capacity to make more money,” he added.
The “fear” or the “state” of global recession, ignited by sub-prime crisis and credit crunch in the US, is now haunting Europe and as well as emerging markets.
US manufacturing orders last week recorded their biggest decline in five months and new home sales fell to a 13-year low. Orders for big-ticket manufactured items fell 5.3 per cent in January. New home sales declined 2.8 per cent to a 588,000 annual rate. Unsold home inventories rose to the highest level since 1981.
Although the US administration is firm in its stance it would not face a recession in 2008 – claiming the economy had a “solid foundation” to guide it through the housing crisis and would be helped by a $170bn fiscal stimulus package later this year – a string of multi-national companies have been responding to the slowdown.
Last week, IBM, the world’s second-biggest IT group, sought to boost returns to shareholders by authorising $15bn in new share buy-backs, with $12bn earmarked for this year.
Caterpillar, the world’s largest maker of construction equipment and heavy-duty engines, said sales in North America had fallen by 11 per cent last year and warned of anemic growth to come. It was one of the first big American companies to warn in October that the economy was entering into a recession. The sectors in which Caterpillar operates – trucking and construction – are seen as barometers of US economic health.
Then recently, two of the largest US companies – Cisco Systems and retail giant Wal-Mart – warned of slowing orders and reporting weak sales, respectively.
Forecasts for global IT spending in 2008 have also been cut dramatically. Global spending on IT goods and services is expected to grow to just $1.7bn in 2008, a six per cent increase on last year, according to Forrester Research. This represents a significant slowdown from 12 per cent growth last year.
Luxury brands are also affected by the market slowdown. Richemont, the world’s second-largest luxury goods company, said underlying growth slowed to 10 per cent in December – against 14 per cent for the full quarter – as demand waned from consumers in two of the world’s biggest economies.
To top these all, crude oil has been orbiting the $100 a barrel mark. This comes against a background of supply problems and expectations that Opec would not increase production quotas at its next meeting.
Whether the 13-nation group would up its output is anyone’s guesses but one thing is for sure: Opec has been glued to its belief that the world is amply supplied with crude.
Emerging markets – such as Asia – are feared to be hit by the recession. Tokyo led the Asian markets tumble yesterday. The Nikkei 225 led the downturn, losing more than four per cent to end below 13,0000. The broader Topix slid four per cent to 1,271. The Chinese market is also unlikely to do better.
“The US recession has an impact on emerging markets; China for one, especially that much of China’s growth is related to its export sector,” Morse said. “The market for Chinese energy-intensive growth is becoming much more difficult to sell; part of it is because of high subsidies given to energy in China.”
He said it is very difficult to provide cheap coal for power generation when importing very expensive coal from the outside world.
“China is extremely manufacturing exports dependent, and if American consumption goes down, that will have huge negative effect,” Slywotzky added. Unlike China, the GCC has a wide diversification base, he said.
“When you have a diversified economic base, there are more opportunities to create connections. And the economies in the Middle East have done a very good job in creating greater diversity. It is a huge advantage.”
The Numbers
6%:Global spending is expected to grow by this much in 2008. This represents a significant slowdown from 12 per cent growth last year
$15bn:The amount authorised in new share buybacks last week by IBM, the world’s second-biggest IT group – with $12bn earmarked for
this year.
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