MANAMA — Outlook for the GCC economy continues to be very positive but the increased risks to the global economy mean that policy makers in the GCC have to remain vigilant, especially in the conduct of monetary policy, a report released by Bahrain-based Gulf Finance House said.
The report titled “GCC Economic Outlook for 2008” touched upon key forecasts and risks and prepared by the Chief Economist Dr. Ala’a Al-Yousuf. The report presents key forecasts and risks for the coming year, which is overshadowed by an economic slowdown in the US.
Ala’a said: “Our outlook for the GCC economy continues to be very positive but the increased risks to the global economy mean that policy makers in the GCC have to remain vigilant, especially in the conduct of monetary policy.”
“Although conditions in the global credit markets have improved in recent months, we forecast a slower growth rate of the global economy. 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 toward 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 in 2008 outlined in the report, is the spillover of slower growth in the US to global demand for crude oil and hence crude oil prices. Despite this, oil prices are expected to drift lower towards $75/b by midyear, 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 in 2008, almost $12,000 on a per capita basis. The external current account surplus is also forecasted to hover around $200 billion and the fiscal surplus to be in the range $150-170 billion. These surpluses are expected to boost (1) government expenditure-smoothing capabilities over the medium-term and (2) finance the spree of cross-border acquisitions by sovereign wealth funds (SWFs).
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, are 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 percent by mid 2008. GCC states have already slashed policy interest rates in response to the sudden Fed rate cuts on Jan. 22 and Jan. 31 and more cuts are expected to follow. Accordingly, GCC governments are most likely to step up the use of sterilization operations via issuing central bank bonds/CDs as well as direct credit/price controls, such as caps on loan-to-deposit ratios, higher reserve requirements, subsidies, and caps on rental increases.
Inflation rates will hover above the 5 percent mark across most GCC states and will be driven by hikes in housing rents and food prices. Real estate prices will stay firm as delays in project delivery, rise in construction costs, rapid inflow of expatriates and growth in mortgage finance accentuate supply-demand imbalances. Positive supply-side responses, however, may partially subdue price hikes in selected sectors.