The route to recovery will not be easy

As we step into 2009 today, we hope it will be a good year.

This year the world is exceptionally concerned because of the global financial crisis and its repercussions in terms of rising unemployment, loss of savings and the uncertainty suffered by millions of people everywhere.

There are facts that cannot be ignored regarding the world economy in 2009.

First, the financial crisis will spill over to all countries without exception, including the economies that isolate themselves and impose restrictions on trade and capital flows.

Second, the crisis did not reach its peak at the end of 2008. Thus it is expected that recession would reach other sectors, especially in developed industrial countries, and more people will end up jobless.

Third, the negative factors that caused the crisis in the first place are still there, and will remain in 2009, including the difficulties facing the United States, the world's largest economy, with budget deficits and war costs on the rise.

In the European Union, views deeply differ on how to curb the effects of the crisis, and these differences will limit the effectiveness of any actions EU countries may take in 2009.

As for emerging economies such as China, India and Brazil, they also started to witness a slowdown by the end of the year. Russia announced in December that its economy is in recession.

All these are major economies that achieved high growth rates in the past 10 years.

Fourth, many economic activities that affect global commerce are expected to go into recession in 2009, including tourism, transport, foreign trade and logistics. This will have negative impact on the global economy and growth rates.

Finally, the credit crisis will continue in 2009, and may spread to credit cards, which will further complicate the effects of the crisis.

Thus, 2009 will be a tough year for global economy. The depression, which will be the worst since the 1930s, will slow down economic growth and increase unemployment.

Paralysis

It will also cause an almost complete paralysis of global financial markets, a sharp decline in the prices of commodities and services and the bankruptcy of thousands of companies worldwide.

Despite this bleak picture, coordination among world countries and the implementation of the recovery plan of US President-elect Barack Obama in cooperation with the EU, China and Japan, will lead the global economy to slowly overcome the crisis by the end of 2009.

Luckily, the impact of the crisis on GCC and Arab economies was lighter than other economies, and the monetary surplus accumulated by oil producing Arab countries in the past five years will help overcome the repercussions of the crisis with fewer losses than expected.

Arab stock markets are the only exception, as they suffered severely and may be affected further due to the uncertainty surrounding global economic scene.

These markets are expected to have more fluctuations due to the psychological link between Arab and international financial markets. This will continue through 2009.

This link may recede after GCC countries approved the creation of a single currency for the region and the setting up of a monetary council, during the Summit that concluded in Muscat this week.

Oil prices will remain at low levels for two reasons. The first is the drop in international demand, especially in the US and China, as a result of the recession. The second is the decline in speculation, which was one of the main reasons behind oil prices reaching record highs in 2008.

The oil price challenge for GCC economies may be harder than the impact of the global crisis, especially since Opec decisions will not have a big effect on oil prices in 2009. Low oil prices will have an impact on public spending, which is the backbone of economic activities in these countries.

But, through joint action by the Arab states, there is still a good chance to limit the effects of the crisis on GCC economies, successfully overcome the challenges of 2009 and build a platform for growth in the coming years.

Dr Mohammad Al Asoomi is a UAE economic writer