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03 October 2023

Great and good forecast doom and gloom

By Darren Stubing
Following the ending of this year's world economic forum, the overwhelming view of the outlook for the global economy is very poor. Global financial and corporate leaders increasingly painted a very bleak outlook for the international economy throughout 2009 and, many say, well into 2010. Fast on the heels of the International Monetary Fund's prediction of global growth at just 0.5 per cent this year, the weakest growth since the end of the Second World War, the unanimous verdict across speakers at the forum is one of still weakening economic growth, rapidly rising unemployment, collapsing sales and falling sales.

The scale of the downturn and frightening speed of deceleration in respect to growth has led to many still not able to predict when the bottom of the cycle will occur. Some have even said the poor economic growth could be with us for a decade. Although this may be extreme, it is evident that any sort of recovery is still some way off.

Employment numbers are falling across the globe, but particularly with large industrialised countries such as the US, UK and Germany.

However, rising unemployment is much wider, and indeed does include emerging markets.

China and Russia fully put the blame of the financial crisis at the feet of the US and imprudent bank lending which created an unsustainable asset bubble. However, financial experts agreed that the specific causes of the financial crisis was excessive levels of debt, too much focus on short-term rewards for long-term risk taking, flawed mathematical models, and greed.

The effects of the crisis will be substantial, both internationally and regionally, and no one could dispute this. In the Middle East, the region not only faces an economic downturn, but significant housing and financial challenges. Business leaders both from the Middle East and outside believe things will get far worse before they get better. The Gulf, with its economic, business and financial power and dominance, will influence what happens for the rest of the Middle East region. Unemployment will rise throughout the region, but particularly so for Jordan, Egypt and Lebanon as they export significant levels of labour to the GCC and elsewhere. Unemployment will be a major challenge for the Middle East, particularly as large numbers of youth start entering the workforce. It is estimated that 100 million jobs need to be created in the Middle East by 2020. The current financial environment will severely restrict the capacity of markets to create the jobs needed.

The Arab region is one that only trades with itself to a very small degree. Trade between Arab countries is estimated at around 14 per cent. Some regional experts at the World Economic Forum believe that without interdependence, the future does not look bright for the area. However, if borders become more open and there is increased economic co-ordination, the region can become integrated economically and the outlook and potential would be brighter.

As with other markets, the Gulf faces the problems and repercussions of asset values that have fallen significantly over the past twelve months. However, looking ahead, there is agreement that following a period of strong correlation during the downturn, the upturn – when it comes – will see different outcomes for different assets. Once the current downturn cycle ends, strong underlying demand bodes well for performance of emerging markets. Currently there is still large de-stocking in the commodity markets. However, the substantial stimulus programmes set by many governments around the world is likely to cause bottlenecks in the economy that will push commodity prices much higher. Looking ahead, the crisis and stimulus packages will likely cause rising levels of inflation as substantial levels of liquidity are injected into the economy.

The liquidity may in turn create further asset price bubbles, including oil, government bonds and real estate. However, the correlations of the downturn will give rise to a more jagged upturn as different asset categories respond at different speeds.

Many economies are only now beginning to feel the effects of the crisis, particularly those that are relatively financially insulated (as they depend largely on domestic funding sources) from global financing markets. However, as world demand falls, their growth is impacted through weaker export demand.

Things are likely to get worse. However, it is unlikely to get as bad as the 1930s, if that is any comfort. Then, the US economy fell on average 14 per cent a year and unemployment reached 25 per cent. The drastic sharp interest rate cuts and fiscal stimulus packages globally will prevent a repeat.

However, the recession could last a year and there could be years of low growth. Fixing the US financial system is key for creating any green shorts of recovery.