Will Gulf States Have a 'Good' Recession?

In my father and grandfather’s day they used to speak of having ‘a good war’, which referred perhaps to somebody who arrived late at the battle front just as the worst fighting was over, and then managed to get sent back for office duties.

Could this be the same for the Gulf States and the worst recession since World War II? They were last into recession, have been somewhat cushioned by oil revenues, and now that oil prices are up stand to recover ahead of other countries.

Down-on-the-ground

The true picture is of course more complicated. Down-on-the-ground the theoretical talk of an oil cushion wears a bit thin when another contract bites the dust or a project is cancelled.

In Dubai, house prices are down 50 per cent, rents are crashing, financial services stagnant or falling, tourism has moved down market to survive and many huge projects have been cancelled, suspended or slowed down.

Even in prosperous Qatar, house prices are off 30 per cent and the boom is a shadow of its former self. And the financial problems of Al Saad and Al Gosaibi are a reminder that Saudi Arabia is not immune, and these bad debts are a serious new burden for Gulf banks.

The problem is surely that the Gulf’s long oil boom was due for a cyclical correction in any case. Six years of boom had resulted in excess capacity and over-investment as well as inflation and this bubble was about to break. That it has now done so at a time of massive global economic contraction just makes it worse.

Oil price upturn

The rising oil price is therefore a blessing but not a complete answer to the economic woes of the region. It is going to take time, and years not months, to really pull the Gulf out of recession, and the crisis may not have hit the bottom just yet. That might be marked by a further crisis in global financial markets and another oil price collapse.

However, the tendency towards higher oil prices – despite a massive global economic crisis – is a big bonus for the Gulf States. It will make their recovery swifter than it otherwise would be, and it perhaps justifies the Economist Intelligence Unit’s prediction of five per cent annual growth for the region over the next five years, second only to China at 7.8 per cent.

That said, while the Gulf may have a comparatively good recession, it still is the worst recession since World War II and not everyone will survive for the upturn.

Comments

[Chandragupta:]

Very true. Dubai was riding on a bubble, it was due to burst sooner or later. There is another wild card that Dubai is riding on - it has an exchange rate linked to the US Dollar. If the Dollar goes down sharply, as is being widely predicted, how will the events unfold in these economies? Anybody's guess.

Jun 25 09:00 AM

[Peter Cooper:]

A lower dollar would boost Dubai's large tourism industry, and attract new inward investment. Not sure the appreciation of the dollar has been positive for Dubai, quite the reverse in fact.

Jul 02 12:22 AM