The global going may be good to soft

Scanning the horizon for influences on the regional economy, there's no clear view to be had, although form suggests that the Gulf will still be well-placed.

Times always change of course, but this year particularly it is no racing certainty that positive international conditions will stay the distance, and key variables not provide some kind of upset.

Just as our review last week of the UAE stock markets concluded that cautious optimism was favourite among analysts, so observers of the US dollar, oil and gold tend to feel that markets are heading for a fairly slow time.

Taking a look at conditions, it seems that the world economy is due for a moderate slowdown. A glance at the US is a fair way of marking your card in that respect, so it's worth making note that weaker growth is expected there, owing especially to the weighty handicap of housing.

According to survey organisation Consensus Economics of London, whose polling of market commentators helps give an inside track of events, the average forecast for US real GDP growth for 2007 is 2.3 per cent, down from 3.3 per cent in 2006. It is a substantially lower figure than the IMF's estimate (2.9 per cent) last September.

UK think-tank Business Monitor International nods in agreement. Its latest five-year outlook remarks that "the global economy should ride out the risks it is likely to confront in 2007", estimating a deceleration in world GDP growth from 5.0 per cent to 4.7 per cent.

Runners

So how about the runners we're watching?

Taking the sanguine perspective again, BMI says its core assumption is that "any unwinding of global imbalances will be gradual, and the dollar will remain largely stable". For instance, it anticipates a level against the euro of 1.27 at year-end 2007. That's a modest recovery from the current rate of around 1.31, and from the decline seen for most of last year (see chart).

Again polling a range of forecasters, Consensus also sees the dollar treading water, with a year-end rate of nearly 1.31.

Steve Brice of Standard Chartered in Dubai gives an explanation for this defiance of trend. "Conventional wisdom is that expected Fed easing would lead to dollar weakness," he confirms, "but history teaches us that, assuming a soft landing in the US, that easing is associated with a dollar rally as investors move funds into US fixed income and equity markets." His pick is a year-average against the euro of 1.30.

Oil is a different animal. Its recent slump still leaves it well up against its historical average, owing to sustained emerging-market demand, notably from China and India. Recent retreat has been ascribed to unseasonably warm weather, a rise in US inventories and (by some at least) some mollifying of tensions with Iran (see chart).

As accompanying graphics sourced from the IMF show, price levels of $50 and higher have generated lucrative earnings for the region, driving home the Gulf's financial power (see sidebar).

Momentum

Consensus Economics reports a relatively upbeat estimation of future prospects from its extensive stable of poll participants, who foretell WTI at $62 at year-end 2007. Opec's intent to cut output and retain the momentum from oil's latterday gear-shift has much to do with it.

Standard Chartered, however, is prepared for "supply growth and continued conservation efforts to bring oil prices gradually lower", posting $57 for WTI at year-end, and Brent at $53.

BMI, meanwhile, takes note of a breach in chart support, saying that both "supply and demand factors suggest lower prices", with supply up 2.5 per cent in 2007 to 91.5 mbd, and demand up 2.0 per cent to 86.9 mbd.

Their benchmark for 2007 is a Brent average of $58, and an Opec basket of $54.5, which should still see the Gulf region cantering along.

So how about gold, which also put on a shining display last year but has since faded (see chart)? As global interest rates rise, its vulnerability to the hurdle of zero yield comes to the fore, and the enthusiasm of previously eager punters has dwindled.

Whilst gold's decoupling from the dollar will persist in 2007 (its relative strength reflecting the currency's weakness), says Standard Chartered, supply constraints should limit decline. The bank has a year-end figure of $600.

BMI sticks its neck out further, again adopting a technical (chartist) approach, and a doubting view on precious metals generally.

"Given the speculative nature of the asset class, price action could well be volatile," it offers. With oil and US inflation slipping, there is "potential for bullion to fall as far as $440". That sort of tumble would unseat the casual rider.

In surveying the scene for 2007, it's really a matter of which forecast takes your fancy, and there's always a chance that another story comes by on the rails.

From an investor's point of view, it's about temperament too, and appetite for risk. Horses for courses, really.