Across the world the economic news is almost universally negative. Even the Russian and Brazilian stock markets have sold off dramatically over the past two months. The UAE bourses have also weakened but the local economic outlook remains strong, and given the terrible prospects elsewhere, the Emirates probably has the best economic prospects in the world for at least the next few years.
This analysis is also the conclusion of a new report from the top management consultants McKinsey which highlights the region’s potential for investment banking, and another study over the summer showed that the UAE is the number one target for expansion among financial services companies for the next three years.
McKinsey sees revenue pools for investment banking soaring by 16 per cent per annum under its worst case scenario, and 25 per cent under an optimistic scenario. I can only agree with the conclusions of this distinguished group, and after witnessing the gloom and doom of the UK and Europe first hand over the summer, it is a relief to be back in the UAE.
It could well be that even here things begin to slowdown by comparison to the last couple of years, but I am not so sure about that. Oil prices might have retreated from $147 to nearer $100. But that is still very high by historical standards, and way above anything the UAE has in its budget projections.
McKinsey raves about the $3 trillion of ‘an unprecedented wave of investments in industrial and infrastructure projects’ in the Gulf States. I might add that as the rest of the world economy slows down then competition among international contractors for these jobs will intensify and costs will fall, benefiting the UAE.
Meanwhile, the strengthening US dollar – more because the UK, Europe and Asia is slowing down fast than anything else – is going to relieve inflationary pressure in the Emirates to some extent, or at least by comparison to recent times.
It is also true that in the UAE high oil revenues have not stopped economic reforms. Sometimes when you strike it rich, you give up on doing new things – simply because you do not need to do so. However, in the UAE in particular – and to be fair the other Gulf States have followed this lead – economic reforms remain top of the agenda.
The McKinsey study notes the huge progress made in local capital markets and the financial services industry in recent years in particular. Western regulatory structures for capital markets and banking systems are creating new opportunities, and increasingly directing business away from the traditional financial centres of the globe and keeping it within the Middle East.
What a contrast this economic outlook is compared with the rest of the world. In the UK the finance minister has stated that the country faces its worst economic prospects for 60 years. This statement sent UK stocks falling seven per cent last week, their biggest fall for six years. UK house prices are crashing.
In the US last week stocks also plunged because of higher than expected unemployment figures and a continual stream of bad economic news. This week markets will have to digest the likely cost to the tax payer of the multi-billion bail-out of the US mortgage agencies Freddie Mac and Fannie Mae, and a powerful hurricane is heading for the southern states.
There is no prospect of an early end to this gloom in sight. In truth, global capital markets look set for a rocky ride over the next couple of months, and the global economy could well slip into a recession for most of next year. After such a long stretch of expansion funded by cheap credit, a considerable period of retrenchment and contraction is only to be expected now that easy credit has gone.
Central banks will soon be preoccupied with avoiding deflation, after it becomes clear that their economies are in real trouble, and stock markets crash. Expect to see one per cent interest rates in the US after a major Wall Street correction.
It is arguable that a major factor behind high oil prices this year was the cut in US interest rates to two per cent which drove speculators into commodities. So a one per cent interest rate will be supportive for oil prices, even in an economic downturn, and benefit the UAE.
At the same time, the US dollar peg means that lower US interest rates will be applied in the UAE. This fall in the cost of money will be supportive for UAE property prices, already benefiting from very high real negative interest rates. In these circumstances the UAE is indeed likely to deliver the highest rates of economic growth in the world over the next few troubled years for the global economy.
