Economist says UAE credit crisis may get worse

Dubai: Even though the current sub-prime crisis may not be as severe as the last one, but institutional and individual investors still needs to be careful in their investment because the crisis in not over yet and things may get worse before getting better, said Philippe Dauba-Pantanacce, Senior Economist at the Standard Chartered Bank's Middle East and North Africa (Mena) Global Markets.

Speaking at the Gulf Cooperation Council (GCC) Institutional Investment Summit at the Dubai international Finance Centre, Dauba-Pantanacce said, "When you have two consecutive quarters of GDP [Gross Domestic Product] contraction; it is a clear indication of a recession. The current turmoil is a demand-led recession as opposed to the previous, stronger corporate-led one."

He said the US consumers represent 70 per cent of the country's GDP, so when the housing market, (which many US consumers use their houses as cash machines to finance their other expenditures) crushed, it affected this big 70 per cent part of the GDP.

He said normally the US housing market circle, otherwise known as a housing bubble, takes five years and it has only been about two years since the crisis broke. So there is still sometime to go before any full recovery can come about.

Indicators

According to Dauba-Pantanacce, other indicators that it may be a while before the crisis is over include the decline of the job market, where the job market in the US has been declining and it may not recover for at least 18 months from now. At the same time credit is now almost impossible. With the job market low and no access to credit, recovery is more difficult to come-by. Also the 'tease rates,' which some US lenders use to lend houses, are lower than the market housing rates, which also need to be adjusted in order to recover from the crisis.

Even though there are pockets of positive growth in the US economy due to the recently issued stimulus package, the growth will be short-lived. With the Consumer Confidence Index at a 30 years low, the Federal Reserve will need to ease their monetary policies in order to ease the crisis, said Dauba-Pantanacce.