A year of uncertainty

13 April 2008
Economists say 2008 could be the toughest year since the 1930s. But they might be wrong.

Confirming what everyone knew, the IMF has declared that the US is heading into recession and that world economic growth will slow as a result.

Its annual World Economic Outlook, published on 9 April, is grim reading only for those who refused to recognise that the US subprime crisis disaster would have global consequences.

Economics will be the dominant factor in world affairs for at least a year. But it is uncertainty rather than gloom that is taking the greater toll on business confidence.

The world is divided into those that believe the downturn will be severe and lengthy and those who are confident it will be shallow and short. What separates the? Mainly subjective factors.

Science is playing a small role in guiding the actions of the world's largest corporations and my guess is as good as theirs.

The recommendations from a special commission created to advise the UAE about its exchange rate policy were made public the same day. The commission called for the dollar peg to be maintained and for there to be no change in the value of the dirham against the dollar.

UAE Prime Minister Sheikh Mohammed bin Rashid Al Maktoum, who said as much the previous week, accepted the recommendations with no comment. With Saudi Arabia resolute on the issue, revaluation in the GCC is now firmly off the agenda until the end of the year, at least.

This may not make long-term economic sense, but it is the best response to the host of uncertainties besetting decision-making in the region. Oil prices came close to $109 a barrel in New York on 9 April, but Goldman Sachs expects prices to decline to around $80 by year-end. Pessimists say $50 a barrel is possible.

Energy price trends will have a critical impact on the value of the dollar. Nothing will help it recover quicker than a swift oil price fall. Nothing will hurt the US economy more than further rises - as some believe are yet possible.

If oil drops, the dollar will rise and some of the inflationary pressure in the GCC will ease automatically. For the leaders of the GCC, this now looks like a better option than bending to the currency speculators betting on a quick profit from currency revaluations.

Uncertainties about the dollar and oil are being compounded by the unusually large number of imponderables being created by American politics.

If the contest for the presidency in November is between the Republican John McCain and the Democrat Barack Obama, it will pit irreconcilable views about US Middle East policy. This means real choice for American voters, but nine more months of doubt for the region.

The UAE exchange rate choice has been influenced, perhaps decisively, by US political factors. Revaluing against the dollar will cause paper losses for UAE and GCC investors in dollar-denominated assets.

But far more damage would be caused by US enemies of the Middle East denouncing the move as an anti-American act. It is in the interests of the GCC to hold the parity, and wait and see who the new president will be and what he (or she) plans for the region.

If the exchange rate card can be used at all as a GCC foreign policy instrument, it should be when its influence on US policy will be maximised. That is when a new White House team is deciding what to do this time next year, not now.

This is wise and a helpful indicator of the right way to act when others are losing their nerve. Stay calm, wait but don't lose sight of the longer-term objective. For the GCC, this is the prize of currency union - although probably not in 2010 - and growing convergence among economies that could form the sixth largest on earth in less than a generation.

With larger issues at stake, a period of inflation is probably tolerable. GCC governments are protecting their national populations with pay rises and increased subsidies.

The uncertainty in American politics will have profound implications. The Republican Party has stumbled upon a presidential candidate best-qualified to appeal at a time of economic crisis.

Over 70 and hardened by war and imprisonment, McCain oozes calm authority that neither of the two remaining Democratic contenders can match. Whatever the excitement among Democrats today, this could be decisive for the American majority in the autumn.

In a year of uncertainty, those with a safe pair hands will probably come out on top, and in the Middle East as much as in America.

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