Recent forecasts for the Gulf region suggest an enviable outlook, with GDP growth well into substantial recovery, inflation under control, and the overall financial balances of government budgets and balance of payments on current account in comfortable surplus. It’s a world away from the deficit-ridden countries of much of the developed world.
Much has changed locally since the parallel slumps in growth and inflation in 2009 among the GCC states, and legacy trends since then. Real GDP slid fairly precipitously around that time, while inflation simply fell off a cliff.
A few weeks ago this column wondered aloud how the future might be, considering that the basic monetary setting of interest rates would remain very accommodating, through the US dollar peg. The quoted analysts suggested that the needs of the US and the Gulf respectively were not so out of line right now, and that other counter-cyclical measures were available to the central bank to contain any recurrence of a surging uptrend.
Still, it prompts a query whether growth and inflation must move in tandem. At present, it would seem that the shock to the real economy, namely of recession, created a lingering impact on price growth. But over time a certain parallel condition might be expected to resume.
In one branch of economics, still very prominent, it was thought that governments could actually choose to accept more inflation as the price of more growth, and indeed should do so as a matter of prioritising job creation. There are prominent voices today still promoting the same idea, despite its obvious vulnerability in a globalized and competitive economy, and the evident frailty of the theory in historical experience.
In practice, governments have to recognize that, whereas growth and inflation may move in line naturally as reflections of the business cycle, those are a sequential series of short-term scenarios, and the longer term requires structural reform to slant nominal growth towards generating sustainable, real outputs, and employment.
Fortunately, the Gulf doesn’t have the same deep-seated issue as elsewhere of needing to revive demand to pay off debt. So it should have the leeway to encourage supply-oriented strategy, also as previously discussed, whether in terms of enhancing labour and product markets, or by regulatory overhaul, to adjust the price-quantity trade-off.
What the analysts forecast for inflation and growth trends might give a clue to that prospect, although there is usually a reluctance to foresee beyond the medium term.
Considering the UAE in particular, whose data in this respect mildly amplify the aggregate view of the GCC economy, Daniel Kaye, senior economist at National Bank of Kuwait, anticipates a ‘below-trend’ pace of 3-4 per cent [real non-oil growth] for the next couple of years (see graph and box). That’s a reasonably healthy rate, restrained essentially by the overhang of financial restructuring still due, as well as a special exposure to global trade and transport.
Inflation, meanwhile, will remain among the lowest in the region, with the workout in residential property still constraining rents. Over time, he credits the dollar peg for helping maintain that stability, though conceding that globalization may have played its part.
Farouk Soussa, chief economist at Citi in the Middle East, notes that the UAE’s GDP growth has rebounded to pre-crisis levels in 2011, yet inflation “has not budged”.
He points to the neighbouring case of Qatar, where “the lack of correlation between growth and inflation seems even more stark”.
“I do not see growth as being the main driver of inflation in the GCC, nor vice versa,” he says, whereas “housing bottlenecks and subsequent construction and property bubbles have had a huge impact.” As oversupply remains, so inflation is still restricted, and sub-zero in Qatar.
Other drivers include bank lending, the exchange rate, and food prices, “very little of which is directly related to domestic economic growth”, Soussa observes.
As ever, the Gulf is sui generis, its own unique case study. Which is presumably why analysts can examine and discuss it repeatedly without simply defaulting to discussions of the oil price.