Middle East should not be complacent over economic growth

11 April 2008

The IMF is increasing growth forecasts but dangers remain as the region will be outpaced in economic growth by every area of Asia except Japan, as well as Africa.

The latest figures from the IMF lay out in clear terms the shifting centre of gravity of the world’s economy. While the US will grow by just 0.6 per cent next year, China’s economy will expand by 9.5 per cent.

On a broader level, the leading developed nations will grow by 3.6 per cent, but emerging and developing economies will grow by 6.6 per cent on average.

The Middle East is caught between the two extremes, but its fortunes are closely tied to both.

As a region, the Middle East is growing at a very healthy 6.1 per cent, but it will be outpaced by every other area of Asia except Japan, as well as by Africa.

Inflation is a key concern, particularly in the Gulf, and unless it is brought under control, some countries in the region could fall further behind the global leaders.

The IMF might have raised its forecast for regional growth, but some banks have reduced theirs. Despite all the efforts to diversify their economies, most of the Gulf’s growth is a direct result of unusually high oil prices that are being channelled back into the economies through government spending.

Any global slowdown leading to a drop in oil prices would quickly make a big impact. Any large cut in US interest rates made to stave off such a recession could stimulate domestic demand in the Middle East further, leading to even higher inflation.

The region’s governments have, on the whole, dealt with the proceeds of the current boom in a sensible way, although Iran remains a notable exception. But it is clear that until their economies are more diversified and mature, they cannot afford to feel too comfort-able just yet.

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