Where is this recession we've all been fearing? I can't see it from Dubai

Dubai recently recorded its longest run of continuous job creation in more than six years. AP

The picture is much improved these days in terms of economic sentiment compared to last August when the concerns for the outlook were dominated by the potential impact of inflation and the war in Ukraine.

For example, in Dubai’s non-oil private sector, data indicates employment activity increased in June for the fourteenth successive month, recording the longest run of continuous job creation in over six years.

The S&P Global purchasing managers' survey shows recruitment was “notably robust” among construction firms, the most optimistic sector.

Demand rose for the 21st successive month in June and business conditions continue to expand, supported by robust retail, travel and tourism industries. In fact, the pace of growth seems to have picked up mid-way through 2023.

That’s despite the rate of inflation being higher than central bankers want it to be.

On Wednesday, the latest figures show consumer prices in the US fell to their lowest rate of growth since March 2021. The consumer price index (CPI) rose 3 per cent year-on-year in June, down from 4 per cent in May, data released by the Labour Department on Wednesday showed. The level of 3 per cent remains above what policymakers want and is regarded as costly because it erodes people’s savings and distorts supply and demand dynamics.

Business conditions continue to expand, supported by robust retail, travel and tourism industries

The Federal Reserve has raised interest rates 10 times over the last 15 months to bring down inflation towards its 2 per cent objective. However, influential economist Charles Goodhart thinks the current level of inflation will settle at about 3 per cent to 4 per cent and remain there for decades. This trend will be driven by persistent labour shortages in major economies like the US that will eventually be managed by automation and AI.

We are effectively living with the consequences of expansive monetary and fiscal policies over the past 14 years. We should not necessarily be overly worried by the idea of higher inflation becoming a fixture. There seems to be the counter force of resilient economic growth despite the higher interest rates.

In the UAE for example, the economy has recovered sharply from the Covid-induced slowdown on the back of higher oil prices and measures to mitigate the effects of the pandemic such as allowing higher levels of foreign ownership. There is a not dissimilar picture in the world’s largest economy. Writing in the New York Times this week, Nobel Prize-winning economist Paul Krugman wrote of the US economy: “I can’t think of another example in which there was such a universal consensus that recession was imminent, yet the predicted recession failed to arrive.”

We had all been sure that the Fed’s policy of raising rates would trigger a sharp slowdown but that has not materialised. There is evidence to suggest our certainty might be somewhat misplaced.

Economic theory and research does not subscribe to the idea that high inflation will always be costly. It is more a psychology at work. Most of us know our history – a century ago hyperinflation destroyed Weimar Germany and more recently it wreaked havoc in Zimbabwe under Robert Mugabe.

We always worry inflation will make us poorer in real terms. Governments know this anxiety is real. So do central bankers. No one wants to be seen to be allowing inflation to run its course unchecked.

But in an era when populism has proved irresistible to both voters and those running for office, policies that target both our conscious and unconscious fears should be treated with a degree of scepticism.

Although major central banks are officially independent, they are not immune to public opinion. In the wake of the financial crisis, central bankers became unpopular when things did not go well for people, regardless of where the responsibility actually lay. Not being political can make you an easy target in fact.

Much like the push for austerity in the UK disguised some of the ruling Conservative Party’s political aims – to the wider cost of health and other services as we see now – so the obsession with being seen to be stridently taming inflation should be observed with a cold eye.

We can, in fact, live with inflation at current levels, especially if business conditions remain strong, and while central banks should always be working on mitigating any pain for the financial system, they do not have a solution to the many realities and challengers we are facing, including the impact of climate change, the deployment of AI and shifting demographics.

The good news for the economic outlook has to be that there is still good news. We should make sure that we don’t undermine such fortune in order to over compensate on inflation – something that at the current level is potentially worse in our minds than in practice.