Portents in place for a downfall in the coming year

Is the UAE heading into a slowdown, or even a recession, in 2016? Peter Cooper weighs up the evidence.

If the UAE was not running a large fiscal deficit this year then the collapse in oil prices would have already plunged the nation into a deep recession.

You don’t need to be a mathematical genius to see that oil used to represent about a third of national income, and with its price down by 60 per cent, that’s a black hole. However, by drawing down on savings accumulated in one of the world’s largest sovereign wealth funds in the good years, it has been possible to not only avoid a recession but to keep GDP growth running at around 3 per cent.

The question for 2016 is can this continue? That depends on two things: the political will of the leadership which is not in any doubt; and the global economic environment for 2016, about which many observers have considerable concern.

Looking back to the last global economic crisis and how it affected the UAE, there are some disturbing parallels. The credit bubble of 2008 is somewhat evident again. The National has reported recently on mounting debt problems among individuals and SMEs. Traffic is bad. Too many Ferraris on easy credit perhaps.

That said, the prompt action taken by the government in late 2013 to prick what could have become another real estate bubble like we saw in 2008 has been effective. The local housing market has cooled down without coming to a complete stop, as it did in 2009.

There should be no repeat of the 60 per cent house price falls of that year, as what has not gone up does not need to come down.

So a combination of pre-emptive action to control the real estate market, and a willingness to dig into national savings to keep the show on the road, is keeping the recessionary wolf from the door.

However, the UAE built its recovery from the last global economic crisis on three pillars: trade, tourism and transport. Think the free zones of Dubai, the expansion of hospitality across the emirates, and the huge investments in Etihad, Emirates airline and the airports.

The UAE is the most open economy in the region. But such openness has a downside as it leaves the nation vulnerable to downswings in the global economy. In 2009, by my own calculations from official data published at the time, Dubai’s trade crashed by 40 per cent in the first half of the year under the pressure of the double whammy of a real estate slump and global financial crisis.

Could we see anything like that happen again in 2016? There are some significant warnings. What else are we to make of collapsing trade figures in Asia? The last Chinese data showed imports down 22 per cent and exports by 7 per cent.

The chief executive of Maersk, one of the world’s leading shipping lines, said recently that the downturn is very much worse than any-thing being talked about by most economists. The hard landing of the Chinese economy predicted to be equivalent to “Dubai in 2009 x 1,000” by the hedge fund billionaire Jim Chanos may already be in progress.

That, after all, is the major reason for the collapse in global commodity prices, including to some extent oil. For 2016 to be at least a reasonable year for the global economy the weak US economic recovery has to be enough to compensate for China.

But can China lean on the United States for support? Could the yuan devalue sharply against the US dollar without crashing Wall Street? And anyway, how strong is a US recovery where unemployment is supposedly low but wages are not rising? Could it not be that US unemployment data is about as unreliable as the Chinese GDP series?

Both the European Central Bank and Bank of Japan have substantial electronic money printing programmes scheduled for 2016, and also want to weaken their currencies against the US dollar to support economic recovery. It is going to be a tall order in this columnists’ view. The financial system may collapse again.

For the UAE, a global economic downturn will mean fewer foreign buyers of property, less foreign direct investment, fewer tourists and a price war in the skies between the airlines. So long as the government keeps its nerve and maintains its own spending – and the reserves are there to do it, although they are not bottomless – 2016 should be a slowdown and not a recession.

One British wit once wrote: “A slowdown is when your neighbour loses his or her job, a recession is when you lose yours”, and 2016 could be that sort of year.

Peter Cooper has been a senior business journalist in the Gulf for the past 20 years.

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