It was always unimaginable that the US government would default on its debts, but the last-minute deal between President Obama and Congress which was emerging in the final days of July will provide only temporary relief to economies closely linked to America’s.
Obama in July warned that the federal government could default on its global debts on 2 August
It’s the second time in less than two decades that a Democrat president has played a high-stakes game of bluff about US government spending with a legislature where the opposition was making the running. In 1995, Congress refused to approve President Clinton’s budget plan and partly shut down the federal government in an action that divided the country, but failed to prevent Clinton’s re-election the following year.
Obama in July warned that the federal government could default on its global debts on 2 August unless there was a budget deal. This prospect now appears to have been averted.
But the underlying trends in America’s economy continue to be feeble. And nothing demonstrates the US’ relative decline than the rise in the gold price to above $1,600 for the first time earlier this month.
The GCC, in contrast, has now entered a new period of robust economic progress. The IMF’s latest forecast shows the region’s dollar GDP growing by 30 per cent to $1.4 trillion this year. Qatar’s GDP is forecast to grow by 50 per cent, a figure that is several times higher than anywhere on earth.
Nothing demonstrates the US’ relative decline than the rise in the gold price to above $1,600
Four factors are behind the new rise in the GCC economy. The first is the oil price, which is likely to be on average about 30 per cent higher this year. The second is growing world oil demand. The consensus is that global consumption will grow by about 1.3 million barrels a day (b/d) in 2011, a rate of growth that is among the highest seen in the past 30 years. The third factor is the elimination of practically all Libya’s oil exports due to the Western-backed rising against the regime of Revolutionary Leader Muammar Qaddafi. The fourth is the impact of sharply increased levels of public spending across the GCC this year designed to prevent the possibility of the rebellions seen in other parts of the Arab world contaminating the region.
GCC growth is expected to continue for the foreseeable future. Forecasters expect world oil prices and demand to rise further in 2012. Growth will also be accompanied by budget and balance of payments surpluses. With the exception of Bahrain, which has been severely affected by unrest and government repression, all GCC states will be healthily in the black. Surpluses are expected to continue to 2016 and are likely to continue almost indefinitely for the Kuwait, Qatar and the UAE.
GCC growth is expected to continue for the foreseeable future
Economic activity in the GCC will be lifted further by a fourth factor. Government capital spending in Kuwait, Qatar and Saudi Arabia is about to enter a new era of rapid growth. Saudi Arabia’s project plans are the region’s largest, but nothing on earth will compare in terms of intensity of capital expenditure with what is coming in Qatar. More than $60 billion could be spent on transport projects alone in the next eight years as Qatar prepares for the 2022 World Cup finals.
That is why the principal issue that will soon confront GCC policy makers is the possibility of a return of the inflationary trends seen before the 2008 global economic crash. Annual price increases across the region reached 10 per cent and were significantly higher in some markets. Building materials were bid up and steel rebar cost more than $1,500 a tonne in the summer of 2008.
All the elements that drove up GCC prices are in place in the summer of 2011. This time, the weakness of the dollar against most commodities will provide a further twist to the process. With the performance of the GCC economy diverging radically from expected trends in the US, questions will once more be asked about whether it makes sense for the economies of the Gulf to accept the monetary policies applied to America’s. And they will be asked with increasing urgency if, as now seems almost certain, double-digit inflation returns to the region.