GCC Economic - April 2009

Spring in the air?

Summary

After months of bad news on the state of the global economy, March finally brought some hope of a turnaround with quantitative easing showing some results, the Geithner plan offering a prospect of relief for the financial sector, and even the decline of the housing market giving way to a more mixed picture. Capital markets across the globe rallied in tandem on anticipation that the worst could be possibly be behind us, while oil prices too showed some recovery as more market participants assumed that the period of demand destruction might be over. Even the G20 meet in London seems to have exceeded expectations, although it is far from clear that its initiatives really offer much by way of fundamentally new departures.

• With the Public Private Investment Program, the US administration proposes to realize the original goal of the USD700bn Troubled Asset Relief Program (TARP), with the remaining TARP funds now being mobilized to buy toxic assets from the financial institutions. The PPIP involves private sector participation with public sector guarantees, but its take-up and ultimate effectiveness remain in considerable doubt
• The global financial imbalances, seen as key contributors to the current economic turmoil, are showing signs of unwinding. Savings are up in the West while the surplus economies are resorting to deficit spending to curb the downturn. This is raising questions on the ability and willingness of the surplus economies to finance the proposed spending plans of key Western economies. Although a dramatic change in the current situation is unlikely, the terms on which US and European debt can be placed on the markets may have to change
• The inflationary burst of last year has given way to dramatically falling asset prices and a reduction in consumer spending has led to mounting concerns about risks of deflation. With a consistent fall in consumer prices, some of the advanced economies are already in a deflationary mode; the recent fall in inflation numbers in China and India point to a fundamental change in emerging markets as well. However, aggressive quantitative easing should contain the problem while also fuelling expectations of inflation
• A delay in the introduction of the Gulf single currency past 2010 has been acknowledged as a possibility. However, there is no unprecedented political determination behind the project as well as an institutional driver in the shape of the GCC Monetary Council
• In spite of some stabilization and even recovery in oil prices, the economic environment in the Gulf remains highly uncertain. Indications are that consumer confidence has plummeted while many important projects are under active reconsideration. Negative sentiment in the real estate market looks set to persist with obvious adverse implications for consumer confidence and bank performance
• The GCC equity markets have reflected some hope that the worst might be over with six of the seven indices ending the month on a positive note. Qatar posted the most impressive gains with a 10% advance