There’s never been a worse time to be an economist. Most failed to forecast the scale of the downturn that began in the summer of 2008.
They are cautious about talking too soon about recovery. Some are even making us gloomier. On 21 June, the World Bank announced that it believed that the global economy would contract by almost 3 per cent in real terms in 2009.
This compares with its previous forecast, made in March, that the downturn would be 1.7 per cent. If the latest one is accurate, 2009 will indisputably go down as the worst year, in terms of growth, since 1945. And the World Bank says the recovery, which it said could start at the end of the year, will be “much less vigorous than normal” because of the finance industry’s limited capacity to lend.
The downbeat tone emanating from Washington contrasts with the upbeat rhythm found in leading GCC economies. There is more than a snippet of good news. The oil price is now more than 75 per cent higher than it was in December 2008.
In the month to 22 June, West Texas Intermediate (WTI) traded at an average of almost $67 a barrel, at the top end of expectations for the year as a whole. There are doubts that the price will go higher and it could fall, although only modestly, during the summer. But the conclusion is that oil will remain solidly above the minimum levels required for general GCC solvency and creditworthiness.
The increase in oil prices since the start of 2009 has been secured with lower than expected oil production cuts. The output of the 12 Opec members since February has averaged more than 28 million barrels a day (b/d). This is almost 1 million b/d above what one pessimistic forecast suggested would be the level needed to stop an oil price collapse in the first half of 2009. GCC oil export earnings could be up to $100m a month greater than previously projected.
With government income higher than expected, GCC governments have more freedom to maintain and even increase capital expenditures. Reports from Saudi Arabia suggest public spending on projects has significantly grown since the start of 2009. Private sector confidence, particularly in the construction sector, has been lifted as a result.
The conclusion is that the GCC as a whole has weathered the worst the downturn could conjure up. There are, of course, exceptions. Dubai remains in the grip of a debt crisis that could yet turn nasty. Some Saudi companies have serious financial difficulties. Bahrain, the GCC country most dependent on non-oil industries, faces difficult choices. But there has been no systemic financial failure as has occurred in the US and Europe.
The question now is when will the GCC recovery begin? The view from Saudi Arabia is that the kingdom’s economy has never actually faltered. A similar story is being told this June in Qatar and Abu Dhabi. Kuwait is, by comparison, in the doldrums, but mainly because of political factors not economic ones.
A return to robust levels of growth will only be possible when the world economy itself starts to rebound. As the experience since last summer shows, the GCC now reflects global trends. At least half the region’s growth depends on what happens outside the GCC. For those that depend on foreign investment and trade, the recession could yet be a long one.
But a growing proportion of GCC activity is endogenously generated. Economic diversification and investment in infrastructure are being reinforced by continuing GCC population growth. These factors alone will be sufficient to get most of the GCC economy moving forward once more in the autumn.
The key missing ingredient is confidence. But even here, the story is becoming more positive.
Most firms have restructured to deal with the shocks of 2009. The goal for employees who have kept their jobs is now growth not cuts. The result, which will be obvious after Ramadan, is likely to be an increasingly positive attitude in most GCC markets from October.
The short, sharp GCC shock is coming to an end and the region is preparing to be the first in the world to start to recording significant positive growth trends.