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In the UAE's case, higher oil prices and the proceeds from them will give the economy ample cushion from a global recession. Plus, banks too have built in sufficient buffers through the years. Image Credit: AP

Dubai: Are the world’s leading economies heading for a synchronised slowdown that could either be a full-on recession or a long drawn out stagflation? If so, how will the UAE and other GCC economies fare?

Analysts say while it is not easy to predict the accuracy of the severity, there would be no pockets of sanctuary including for the GCC. However, an economy like the UAE that has substantial external reserves, rising government revenues from high oil prices, and a banking sector abundant with liquidity, will find a recession to be less painful.

The International Monetary Fund (IMF) loosely defines a recession as a period of decline in economic activity. Most analysts use, as a practical definition of recession, two consecutive quarters of decline in a country’s inflation-adjusted GDP.

The IMF, the Institute of International Finance (IIF) and the World Bank have warned that the world is fast slipping into a slow growth period. “A global recession [this year] is not our core scenario, though we see a greater risk next year,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank. “Risk of policy missteps are also high, alongside potential for geopolitical factors pushing up food and commodity prices further.”

According to the IMF, global economic prospects have been severely set back, largely because of the conflict in Ukraine. “Even before the attck [on Ukraine], inflation in many countries had been rising due to supply-demand imbalances and policy support during the pandemic, prompting a tightening of monetary policy,” said Pierre-Olivier Gourinchas, Director of Research at IMF. The entity has lowered worldwide growth from 4.4 per cent annually as recently as January to 3.6 per cent, while the World Bank lowered growth forecasts to 3.2 per cent from 4.1 per cent.

Tightening consumption

Analysts see a recession as inevitable in Europe as the impact of Russia's attack on Ukraine bites into economic growth amidst a looming energy crisis. In the US, it is the rapidly rising inflation and the Fed’s attempt to fight it using higher interest rates that would slow down US - and global - consumption. In China, the latest Covid-related lockdowns could cause new bottlenecks in global supply chains. Faced with flagging export demand, China is already finding it hard to keep up with its 5.5 per cent GDP growth target.

Impact on UAE, GCC

“The GCC economies are more shielded thanks to the strong oil price and production outlook,” said Malik. “However, there will be some dampening impact from higher inflation and interest rates.”

While the UAE economy is relatively more open and thus exposed to external risks, the impact from Ukraine and the expected slowdown in Europe is expected to be limited. UAE banks have limited exposures to Russian and Ukrainian banks. The indirect positive impact on the UAE banks, via higher oil prices improving economic confidence and liquidity in the banking system, far outweighs the adverse impact of the war.

Of course, there will be the higher interest rates to factor in. “Despite this [rising interest rates], growth in credit to the private sector will remain robust given the improvement in the liquidity of the banking system and stronger demand for credit,” said Garbis Iradian, Chief Economist, MENA, IIF.

Setting off a recession
A recession can be triggered by a country’s decision to reduce inflation by employing contractionary monetary or fiscal policies. When used excessively, such policies can lead to a decline in demand for goods and services.

A sharp increase in oil prices can be a harbinger of a coming recession. As energy becomes expensive, it pushes up the overall price level, leading to a decline in aggregate demand.

As businesses and households face difficulties in meeting their debt obligations, they reduce investment and consumption, which in turn leads to a decrease in economic activity.