The Gulf private sector needs time to recover from financial crisis

08 November 2010

Two-speed recovery threatens long-term growth rates in the GCC region. Businesses must deal with the overcapacity built during the boom

It is easy to look at the headline growth rates for the GCC economies and say that the financial crisis is over.

Growth in the region is expected to rebound to 4.5 per cent in 2010, from 0.4 per cent in 2009. The figures don’t tell the whole story, however. Most of the growth is coming from a recovery in oil prices, which now seem stable after two years of wild fluctuations, along with government spending.

This can only do so much for the economy. Unless there is a significant increase in oil production, oil growth will slow as prices are expected to increase only modestly in 2011.

Government spending is helping to support business and will trickle though the economy, but prudence dictates that large spending packages cannot go on indefinitely. Something will have to fill the gap and boost gross domestic product growth enough to help the region fulfil its diversification and employment goals.

In the boom years, the private sector was a significant driver of growth, particularly in the case of real estate and construction, where the private sector was more active than the public sector.

This has now reversed. No reliable figures exist for the health of the private sector, but slow credit growth, low inflation and sluggish non-oil sector growth all indicate that the private sector is struggling.

A recovery in the private sector relies on businesses tackling the overcapacity built up during the boom years, deleveraging and banks starting to lend to small, privately owned businesses again.

Although confidence in the strength of the recovery is picking up, it will be some time before the private sector has worked through these issues and is back on a strong growth path.

The challenge will be making sure the private sector has recovered by the time regional governments have to start curtailing their spending.

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