The long and often synchronised economic recovery following the global financial crisis is coming to an end with analysts busily downgrading their growth outlooks.
Earlier this month, IMF managing director Christine Lagarde warned that "the growth is losing the momentum that we had hoped for pretty much across the globe" and noted that there are clear downside risks including Brexit and US-China trade tensions that have affected business confidence.
In past slowdowns - or even recessions - dwindling private demand has typically been countered by governments and central banks leaning against the wind. They let budget deficits rise and slashed interest rates. Unfortunately, this time round the main economic powers appear poorly prepared to dampen declining growth prospects.
Central banks’ policy rates remain at or close to zero and non-conventional measures have bloated their balance sheets to unprecedented levels. Even the US federal funds rate stands only at 2.25 per cent after nine hikes beginning in late 2015. During recessions, the Federal Reserve typically would lower rates by between 4 and 5 per cent. Not much room for maneuver wherever you look.
The ability to ease is similarly compromised for fiscal policy. At the peak, general government debt for the G7 countries rose by an average of 37 percentage points from 2008 levels to 119 per cent of GDP, according to IMF data. Since the respective public debt peaks, the debt stock had by 2018 declined by only 4 percentage points. Excluding Germany, that decline would be a puny 1 percentage point - negligible by all accounts.
The G7 economies therefore enter this next global slowdown with a greatly debilitated balance sheet. Other things being equal, the erosion of monetary and fiscal defences suggest that a future recession will be deeper and more drawn out than what we have become used to. The macroeconomic toolbox has been summarily raided during the last crisis - and it was never replenished in the aftermath.
In comparison, the GCC authorities appear to have more wriggle room to confront any deeper slowdown if and when it comes. Monetary policy has always been hampered by the ubiquitous fixed-exchange rate regimes in the region. That has not changed. With the exception of Kuwait, which pegs its currency to a basket of currencies not just the dollar, GCC central banks simply have no choice but to broadly shadow monetary decisions made in Washington. On the face of it the fiscal debt trajectory looks similarly feeble as in the G7. Post-crisis peak debt rose on average by 33 percentage points of GDP, only to drop back by 3 percentage points by 2018.
That average, however, hides two entirely opposite trends: Saudi Arabia and the UAE (and to a lesser extent Kuwait) have been able to reverse much more of the debt ramp-up during the crisis decade following 2007, 56 per cent and 39 per cent, respectively. Bahrain, Oman and Qatar on the other hand appear to chase one debt-ratio record after the other, year after year. Their respective public debt ratios were around five times higher than before the crisis. No credible signs of reversal seem in sight. We are witnessing a stark and unparalleled bifurcation between those GCC countries that have broadly recovered from the global shock and those that have not. The credit ratings of the fiscally weaker member states have been duly lowered on multiple occasions.
No picture of macroeconomic resilience and government balance sheets would be complete without regard for reserves that have been stashed away during good times. And here the difference between the G7 and some GCC members could not be more glaring. G7 countries by and large have next to no liquid financial assets to offset their obligations, which is why gross debt and net debt are broadly the same for most. With the exception of Oman and Bahrain, all GCC members are net creditors. Even Bahrain, the fiscally weakest GCC country, has a better net debt position than all G7 governments bar Canada and Germany. In fact, Abu Dhabi and Kuwait have the strongest net asset positions of all sovereigns globally.
For now, this gives the larger GCC countries much more budgetary power to counter any downturn.
Moritz Kraemer is Chief Economic Advisor at Acreditus, which is a member of The Gulf Bond and Sukuk Association.