Is recession inevitable?

14 April 2016

UAE faces potential current account deficit in 37 years

Too slow for too long is an apt title for the IMF’s latest economic forecast.

The downswing in the UAE’s current account balance between 2012 and 2014 is nearly cyclical but the drop from $54bn in 2014 to $13bn in 2015 is too abrupt and nearly unprecedented. With weakening exports, a deficit in current account balance, it now appears, is inevitable.

A leading economist told MEED that she was forecasting a decline but not a deficit on the country’s current account status in 2016.

While there may be more than a dozen ways to interpret and extrapolate the data generated by the fund over the coming days, what is obvious is that the economy will remain weak over the medium term - maybe longer than in any preceding downswings - simply because there is a short supply of good news.

OPEC will not cut down on oil supply, demand for oil has weakened not only because of China’s sluggish economy but because nearly every country has now committed to reduce their fossil fuel consumption, and the threat of political instability would not go away.

While the UAE’s nominal GDP, government revenues and current account balance are all projected to return to positive territory next year, the IMF forecast showed conservative growth projections in succeeding years.

Analysing how slow recovery in advanced countries follows a recession, a senior fellow at the Peterson Institute for International Economics, C Fred Bergsten, says that low potential growth is bad news for the medium term due to the presence of hysteresis - or that recession affects potential growth.

The other explanation Bergsten offered is causality running in reverse, where bad news about future potential growth leads to a recession. He cites that companies often cut down on investment once they realise that sales prospects are worse than they thought, and consumers do the same once their income prospects worsen.

To risk being tautologous, it now seems that uncertainty is the only certain parameter going into the future. This could mean individuals, companies and the leadership will be forced to make decisions that they are probably not comfortable with and whose outcomes are increasingly less predictable.

Needless to say what everyone wants to avoid is a recession induced by a lack of good news, or by indecision due to uncertainty.

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