Recent events and global economic data are increasing fears that a second global downturn is on the way, but what is more likely is a generally steady return to solidity.
Double-dip or nothing more dire than a blip?
The second half of the year has begun amidst growing doubts about the sustainability of the global recovery. Financial markets are suggesting a double-dip recession is a real threat, and recent data have tended to support this view. At the same time policymakers are arguing that the global expansion remains intact, although most likely at a below-trend rate. So who is correct?
Recent growth fears have been centred on the US after a run of releases showing below-consensus data. The US jobs data for last month certainly highlighted a weak end to the first half of the year, aggravating fears of a mid-year lull. The payroll figures showed private-sector jobs growth of 83,000, but with the unwinding of recent hiring to conduct the 2010 census, there was an overall net jobs loss of 125,000. However, more significant is that a weak round of remaining economic data for last month is now on the cards, thanks to a broad-based drop in hours worked and earnings having a negative impact on personal incomes and production. Civilian jobs figures also plummeted again last month after big declines in May, sending another ominous signal about the third quarter despite the drop in the jobless rate to 9.5 per cent.
This renewed softness in the world's largest economy comes amidEurope's debt crisis and with the euro zone, the UK and Japan all likely to face the strain of enormous austerity programmes introduced to reduce unsustainably large fiscal deficits. China is also showing signs of moderating growth as the government struggles to deflate its property bubble, although a double-digit growth rate is more than likely going to give way to a still reasonably strong 9 per cent pace.
In light of such developments, it appears sensible to begin factoring in a weaker second half for this year. However, despite such a setback, the likelihood remains that the global recovery will remain on track, albeit at a more sluggish pace. A second dip to the lows of last year appears to be of relatively low probability at this stage, with the US still eyeing a further fiscal stimulus package this year, and with global central banks remaining more alert to the dangers of deflation than pre-emptive of any resumption of pricing pressures, which in any case look unlikely to materialise. After all, relatively sluggish growth was in all probability the bargain that global policymakers reckoned on when they embarked on their unprecedented stimulus measures, substituting private debt and spending with the public variety in 2008 and last year.
Now that the bills for this government spending are starting to come due, the path ahead seems likely to be more subdued than the V-shaped recovery implied by markets in the latter part of last year. However, having been sheltered by governments from outright depression last year, the private sector is now in a better position to begin taking up the strain as public-sector spending tails off. Global manufacturing and services are still expanding, with global capital equipment expenditure rising strongly and employment now picking up around the world as well, albeit at varying rates. But after the sharp inventory-driven production gains of the first half of this year, at some point an adjustment with more modest demand was likely, causing output to moderate as we are now seeing. This, though, should not be confused with a return to the contractions of a year ago.
Where does the Middle East and, to be more specific, the Gulf, come in all of this? Try as they might to diversify, this region's economies still rely heavily on demand for their hydrocarbon resources. And at today's oil price of about US$72 per barrel, the outlook is fairly positive from a number of perspectives. Most obvious that the higher oil price this year should mean expanded oil output, a significant contributor to regional growth rates.
Average prices for the year are even higher than the current spot price, closer to $80, meaning that they would also have to fall very sharply from here before budgets based on levels closer to $60 per barrel would theoretically be jeopardised. This means that governments will be able to stimulate demand further if needs be. From a global perspective, the more moderate price of oil is conducive to supporting global household demand, thus underpinning the recovery on which our trade with the rest of the world (particularly in the UAE) depends. And from another angle, the decline in commodity prices in general is helping to anchor inflation expectations globally, allowing central banks to maintain generous monetary stimulus measures, probably well into next year.
Having entered the downswing later than most, however, the region's economies are taking longer to emerge from it. Regional markets are also underperforming in relation to their emerging-market counterparts. Regional governments joined in the global monetary stimulus, in some cases leading it, but overall, local monetary conditions remain tight, with the exception of Qatar, where money supply growth is approaching 40 per cent.
Complicating the recovery elsewhere is the legacy of past lending excesses, with the consequence that banking sectors are preventing the liquidity being pumped in by the authorities from reaching the man in the street. In the UAE, this problem is particularly pronounced, with the latest data released by the UAE Central Bank showing that credit growth in May was just 1.8 per cent higher than in the same period last year.
The uncertainty about the recovery in the global economy will no doubt add to these tensions, potentially impeding consumer appetite for loans at the same time as their availability remains limited. Again, however, a sense of perspective is required. Conditions are a far cry from those that confronted policymakers at the start of last year, and the omens are promising that the steady progression towards recovery will continue. Pricing power is picking up gradually across the region, and it appears likely to be only a matter of time before the liquidity pumped in by governments as well as from rising oil prices will start circulating more freely through local economies. Here, too, the debate about a double dip looks as far-fetched as it does in the rest of the world.
Tim Fox is the chief economist at Emirates NBD but is writing here in a personal capacity firstname.lastname@example.org