Surging oil prices a setback for shaky recovery

Dubai: A double-dip recession in the West and higher inflation in the East — that is the outcome if oil prices continue to be pushed higher because of events in the Middle East and North Africa. As vital as the impact of oil prices is, it is just one of a number of issues linked to the unfolding events in that energy-rich region of the world.

The world is two years into an economic recovery. Initially driven by the emerging world, the US economy is now showing signs of stronger life, but there are still doubts about the sustainability of its pick-up. Recovery there is still fragile and could easily be thrown off course by higher oil prices.

One aspect of the global recovery that has been highlighted by recent events in the Middle East and North Africa is the reality that not everyone is sharing in the upturn.

Social, political and economic factors have combined to trigger recent unrest. Let me focus on the economic backdrop. Across the globe, the unemployment rate is just under seven per cent and the ratio of those in work — the so-called participation rate — is about two-thirds. This means that, of those people aged between 16 and 65 — those old enough to work and too young to retire — two out of three are in jobs. Certain groups such as students are not included in this data. Also, people who bring up their children will be counted as not working, even though what they do is probably the most important and difficult job there is.

Within the Middle East and North Africa region (Mena), the figures are 10 per cent unemployed and a participation rate of around 50 per cent. But for young people, the figures are truly frightening. Across Mena, one in four young people are unemployed. In Egypt, 70 per cent of those in their twenties are without jobs. It is bad enough not having a job, even worse if you think there is little future prospect of finding one.

Young population

In recent years, I described Mena in terms of the three Ds: demographics, diversification and the dollar. Mena has a huge young population. However, this can soon become a demographic disaster if jobs are not created for the local population.

Hence, there's a need for that region to diversify their economies away from energy, to generate jobs. But this economic diversification can take time and requires the right policies and the need to invest. Then there is the dollar issue wherein, for too long, the region has tied its economic policies to the US. That too needs to change.

How will events there play out what will be their impact? The local impact includes a civil war in Libya, and army control in Egypt. The rest of the world watches these developments with concern, but is somewhat insulated. It is the regional and global ramifications that warrant greater attention.

So who is next? The key question is whether this is a regional revolution, as in Western Europe in 1848, or Eastern Europe in 1989 after the fall of the Soviet Union. There is no domino effect in the sense that if one country falls, another has to follow it.

The challenge is to try and identify where a similar set of circumstances that triggered problems in Tunisia and Libya exist? But this is never easy. Yemen, for instance, is often cited. A poor country, where 70 per cent of its population is below 25, Yemen does not have money to address problems.

Yet, locally, it is the 1990 unification of North and South Yemen that attracts criticism, not the overthrow of those in control. Also, the social network, Facebook, appears to have played a key role in events elsewhere. In Egypt, there were five million subscribers but, across Yemen, only one per cent have access.

Saudi Arabia is the major swing producer of oil. The Mena region produces one-quarter of the world's energy, with Qatar a key supplier of gas, and Saudi Arabia of oil. These two are members of the six-country Gulf Cooperation Council that also includes Oman, Kuwait, Bahrain and the United Arab Emirates.

This region is very different from North Africa. It is wealthy and, with the exception of Saudi Arabia, its local populations are small. But the fact that Oman and Bahrain have seen problems has sent alarm bells ringing and contributed to a risk premium being factored into oil prices.

Global recession

The last five global recessions have all been preceded by high oil prices. However, the recent global recession was blamed on the financial crisis. The impact of high oil and commodity prices in the summer of 2007 has been largely overlooked, although it was already contributing to an economic slowdown.

It is noteworthy that when the Iranian monarchy fell in 1979, no one saw it coming. Even with hindsight, many said it was not possible to predict the Shah's downfall. It is important to keep this in mind when trying to anticipate how events will unfold across the Middle East now.

In Asia and many other regions where demand is strong and wages are rising, both firms and retailers have the ability to respond by raising prices without hurting sales. Central banks in these countries need to respond by raising interest rates to keep inflation in check.

Of course, it will be a challenge, particularly if they fear a double-dip in the West. After all, as the recent financial crisis demonstrated and as events in the Middle East and North Africa show, the world is not decoupled. Events in one part of the global economy can have a profound impact on people elsewhere.

- The writer is Chief Economist at Standard Chartered Bank.