x Abu Dhabi, UAEMonday 24 July 2017

The end of the beginning

Individual consumers and international finance ministers alike should note that we have merely reached the end of the beginning of this global economic slowdown, not the beginning of the end.

So now, the real slowdown begins. Thanks to an unprecedented infusion of capital from central banks all over the world, the pressure on credit markets and freeze in inter-bank lending that almost brought the global economy to catastrophe appears to have eased over the past ten days. But individual consumers and international finance ministers alike should note that we have merely reached the end of the beginning of this global economic slowdown, not the beginning of the end.

As companies report their third quarter earnings, the "real economy" has clearly been affected by a downturn that began in the property market, and cascaded into investment banking. In the United States alone, there were 2,269 layoffs of more than 50 employees in the month of August, up from 497 last year. The International Monetary Fund issued a report on Wednesday indicating that the slowing of economic growth throughout the western hemisphere would continue into at least the first half of 2009, with most economies experiencing no growth or contraction. This trend will not be confined to one half of the world: as consumption declines, particularly in America's massive consumer economy, there will be few shelters from a protracted economic slowdown, perhaps not even here in the UAE. While the UAE has stepped in to provide a backstop in credit markets and provide much needed liquidity to its banks, finance ministers should now take the necessary action to prepare for a cooling off in local growth.

It may only be the end of the beginning, but that does not mean it is the end of the world - just the end of the world as we knew it. For far too long, intellectual capital was expended in designing packaging, but not necessarily in creating efficiencies that would drive real economic growth. If this crisis has taught us anything, it is that packaging - whether of high and low grade debt into collateralised debt obligations or of real estate projects themselves, does not necessarily create long term-value in the real economy.

"No one knows how to establish value any more," said Joseph Stanislaw, the former President of Cambridge Energy Research Associates, commenting on the plummeting price of oil, down nearly 50 per cent from its summer highs. While Mr Stanislaw was referring only to the price of a single commodity, his comment may hold true for other areas of the economy: and it is not necessarily a bad development that a retrenchment is emerging on what it means to create value in the larger sense. Investments such as Abu Dhabi's in Advanced Micro Devices, to make cheaper, more efficient microprocessors for the world's computers, or in new thin-film solar technologies as part of the Masdar initiative, are examples of what the world will require going forward. The UAE should be mindful that this economic slowdown may provide opportunities for investment in the technologies and ideas that will eventually drive the global economy out of its malaise.