The pandemic dealt a severe blow to the economies of the Gulf due to the collapse of the local tourist industry and all the associated hospitality, travel, entertainment businesses subject to social distancing or even closures.
With the arrival of several vaccines at the close of the year, what are the prospects for 2021? In my view, the outlook depends on the evolution of three main factors: progress in dealing with the virus, the growth of money and credit and, beyond that, the outlook for the oil market.
The rollout of vaccines to a sufficient proportion of the world population to enable consumers and businesses to return to normality will probably take at least the first-half of 2021 - and possibly longer for some countries. As they usually do, financial markets have moved ahead of events – in this case the successful production and widespread distribution of the vaccine – with the Dow Jones Industrial Average and other key indices surging to new highs.
If we accept the verdict of investors in these markets, the future beyond the next few months – when the virus will continue to infect populations and restrictions on movement and social gatherings will continue to be necessary -- looks promising.
Second, the extent of monetary and fiscal support to economies undergoing waves of the pandemic is critical in ensuring most sectors are ready for a rapid bounce-back once the virus subsides. In the developed economies, the financial support from governments to firms and individuals required to suspend their normal economic activity has been quite astonishing in scale and speed of delivery.
Cost of support
However, many emerging economies have not been able to provide as much support since their debt markets do not have the capacity of their developed economy counterparts. Also, the data on the fiscal side is hard to assess because government programmes have consisted of a whole range of grants, loans, tax deferments, rental holidays and loan guarantees – actual and contingent expenditures that may or may not ultimately be a burden on the state.
It is much easier to assess the support on the monetary side. The most straightforward way to measure the stimulus is to look not at declines in interest rates (which can be a highly misleading measure of monetary ease), but at the rates of growth of broad measures of money and credit.
In the US, for example, M2 has grown by an extraordinary 23 per cent over its level a year ago – the highest growth rate in US peacetime history – thanks to the Fed’s asset purchase and loan programmes. Normally nominal GDP – GDP in current prices – grows at a rate that is close to the average annual broad money growth over the previous two years.
However, on this occasion although the injection of money was very large, it was also very brief – between March and July 2020. Since then it has returned to a more normal growth rate of 5-10 per cent per annum.
This implies that over two years the net boost to current spending in the US will be much more modest that the 23 per cent figure suggests, perhaps in the region of 12 per cent. Nevertheless, this suggests a strong recovery in the second-half of 2021.
Applying these considerations to the UAE we find that broad money growth is around 10 per cent per annum, but credit to the private sector has grown much more slowly at around 4 per cent, both very much less vigorous than they were prior to the global financial crisis of 2008-09.
Tagged to multiple factors
With the domestic boost to activity from money and credit remaining subdued, the recovery in the Gulf area in 2021 will be highly dependent on external factors such as tourism and the recovery of the airline business.
The third factor is the oil market - 2020 has been a tumultuous year for oil. Prices began the year by drifting lower, driven primarily by recessionary worries, trade anxieties, and excess supply stemming from LNG production in the US.
Oil's long road
The pandemic arguably has its largest effect on consumer spending and aggregate demand, to which the oil market is highly sensitive. Consequently, when it became apparent that COVID-19 would spread globally oil prices plunged.
Incredibly, due to logistical constraints in storing a large supply of oil and severely suppressed demand, oil futures contracts turned negative on April 20, 2020, reaching $38 a barrel over the course of the day.
To see a healthy upswing in oil prices will require that key economies return to roughly normal growth rates and consumers to something close to previous lifestyles, raising the demand for fuel. In my view, the US and China are on course for such an upswing, but Europe and Japan are likely to see a less exuberant recovery.
In sum, these three factors imply that the economic recovery in the Gulf area in 2021 will be a modest one, still constrained by the hangover of the pandemic, rather low credit growth and a slow recovery in the oil market.
- John Greenwood is Chief Economist at Invesco.