Growth in the Middle East to slow

24 October 2011

While oil-exporting countries face a brighter future than oil-importers, both will face serious challenges

In 2009, as the brakes were suddenly put on the Middle East economy, it felt like a recession, even though most countries continued to report gross domestic product (GDP) growth. The collapse of asset prices, the drying up of credit and a drop in oil prices made the economies of the region’s oil exporters feel as troubled as their Western counterparts.

As the developed world looks increasingly like it will slip into recession … that will weigh on oil exporters

As the developed world looks increasingly like it will again slip into a recession, or at best a period of sluggish growth, that will once more weigh on Middle East oil exporters. But this time, there is no credit bubble to deflate and strong balance sheets and continued spending should stimulate growth.

Even if growth drops from 7.2 per cent in 2011 to 4 per cent in 2012 as predicted, the slowdown should not result in a drop in consumer confidence. The danger is the long-term cost of government largesse that has been doled out to appease citizens. Breakeven oil prices have risen dramatically as a result. Not only that, but most of the spending has been unproductive, such as increasing salaries, which fails to create jobs and, as most consumer goods are imported, actually acts to reduce GDP.

For oil-importing countries, it is a different story. Because their economies are not so closely tied to the developed world, or dependent on raising foreign capital, the 2009 slowdown was less dramatic. Now, they are going through a sharp slowdown. Anti-government protests  have not only hindered economic growth, but are also weighing on private-sector investment.

Confidence will struggle to recover in 2012. Growth forecasts have been cut dramatically since a year ago. Reluctance among transitional or embattled regimes to cut subsidies means budget deficits are growing. In the midst of the revolutionary atmosphere, the private sector has come to be regarded as corrupt as the regimes that the people are protesting against.

Despite different economic outlooks, both sets of countries face serious issues.

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