GCC outlook positive, says expert
Manama, February 13, 2008
The outlook for the GCC economy remains very positive but policy-makers will have to remain vigilant in the face of risks to the global economy in the conduct of monetary policy.
That is the conclusion of a report produced by Gulf Finance House chief economist Dr Ala'a Al Yousuf.
'Although conditions in the global credit markets have improved in recent months, we forecast a slower growth rate of the global economy,' he said.
'Indeed, the global financial markets are assuming a recession in the US and significant contagion to the rest of the world. We think that this is too pessimistic.
'The US faces a prolonged period of lower growth rate than its potential as the macroeconomic imbalances and financial conditions gradually adjust towards sustainable levels.
'Nonetheless, other major economies, such as the euro zone and Japan, have not seen the same excesses, and should hold up reasonably well.
'The rapidly developing economies of Asia in particular, led by China and India, should be able to de-couple at least partially from the US, as they have done before.'
The key risk to the GCC this year is the spillover of slower growth in the US to global demand for crude oil and hence crude oil prices, the report states.
Despite this, oil prices are expected to drift lower towards $75 by mid-year, as increased supply catches up with weakening demand and the dollar stabilizes, but then pick up again in the second half of the year.
Based on these conservative assumptions for the global economy, GCC-wide oil and gas export receipts are forecasted to top $450 billion this year, almost $12,000 on a per capita basis.
The second key risk to the GCC highlighted in the report is stubbornly high inflation, given the very limited scope for the use of monetary policy.
Inflationary pressure, however, is expected to moderate this year. Global inflation fears are now overdone, and will not prevent major central banks from responding to the downside risks to growth by cutting interest rates.
In the baseline scenario, the US Fed will slash the Target Fed Funds rate to 2.5 per cent by the middle of this year. GCC states have already slashed policy interest rates in response to the sudden Fed rate cuts on January 22 and 31 and more cuts are expected to follow.
The report adds that speculation about a possible concerted one-off revaluation of the currencies of four GCC states (excluding Kuwait and Oman) could return in the next few months.
This and two other possible scenarios are discussed in the report.
This is a major policy issue that is unlikely to be decided under market pressure and GFH will continue monitor developments and analyse them in future reports.