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ECONOMIC BAROMETER

ECONOMIC BAROMETER

2012’S ‘TWO-SPEED’ GLOBAL

ECONOMIC OUTLOOK What does 2012 hold in store? Will this year be as surprising and volatile as 2011? Karim Nakhle looks at the forecast and outlook of the global economy for 2012 with a focus on the Middle East and North Africa regional expectations.

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ost will have heard of the dreaded ‘double dip recession’ and a ‘u, v or w shaped recovery’. The economic lexicon gets larger by the minute. With every gain, loss, boom or recession, new words are added to our lingo, making us familiar with new terms, which politicians randomly use in public speeches and social gatherings. They are all Ă XHQWLQÂśHFRQRPLFGLDOHFW¡EXWUDUHO\HYHU apply what they have learned, probably because they were using the terms without ever knowing their real meaning. Here, then, is one new term to use in 2012: a ‘two-speed’ global economy.

What is a ‘two-speed’ global economy? A ‘two-speed’ global economy is an economic term that has been spreading recently. The WHUPFRPHVIURPWKHĂ€UPEHOLHIWKDWWKH global economy will be characterised by a division and difference in recovery, growth or movement, varying from continent to continent, in a detached manner, different from the global movement of the 2008 Ă€QDQFLDOFULVLVZKHUHWKHZRUOGZLWQHVVHG dramatic losses, simultaneously, everywhere. Although the global economy faces a VLJQLĂ€FDQWVORZGRZQLQWKHĂ€UVWKDOIRI the ‘two-speed’ global economy is expected to kick in as of the second half, with the advanced

economies of the euro area witnessing tougher time, the United Kingdom (UK) economy being pushed back into the recession, and the United States (US) keeping the growth belowtrend at more than 1.5 per cent. Asian markets and most countries in the Middle East, Africa and Latin America seem poised for resilience, hoping to post in excess of 5.5 percent growth, and will be the dynamic force behind the ‘second-speed’ of the economy. These points to the continuation of a ‘two-speed’ world, where a fragile West contrasts with a resilient East. It is a divided and disconnected world economy facing major policy dilemmas. Yet, no region is fully decoupled from events elsewhere.

VARIED GROWTH The world economy grew strongly in 2010, expanding 4.3 percent, before cooling in 2011, when it grew by around three percent. With a recession now on the cards in Europe, global growth is expected to slow down to 3.2 percent in 2012 for the full-year. Oil markets are likely to weaken, although sustained growth in emerging markets for oil demand will provide support. 'XULQJWKHÀUVWKDOIRISUREOHPV in Europe and the West will weigh on global growth. By the second half, stronger growth across China and other emerging economies should pull up worldwide activity. It will be a recovery made in the East and felt in the West. If ever one needed to illustrate the shift in the balance of power, this would be it. According to forecasts, Asia’s gross domestic product (GDP) growth will slow to a stillrobust 6.5 percent in 2012 from 7.3 percent in 2011. While China’s growth will decelerate from 9.2 percent to 8.1 percent in 2012, growth in India, Asia’s third-largest economy, is expected to accelerate mildly to 7.4 percent LQWKHÀVFDO\HDUVWDUWLQJ$SULOIURP seven percent in 2011. Indonesia, South East Asia’s largest economy, is forecast to slow to 5.8 percent from 6.5 percent. The divergence between the performance of the high-income countries and that of most emerging economies is remarkable. In the former, unemployment is high, output well

Qatar, a small OPEC oil producer but the world’s top liquefied natural gas (LNG) supplier, produced 0.8 million barrels per day in 2010 to 2011 and the level seems set to remain unchanged in 2012. below trend, monetary policy still aggressive DQGĂ€VFDOGHĂ€FLWVODUJH%XWLQPDQ\ emerging countries spare capacity has been UHDEVRUEHGDQGLQĂ DWLRQKDVEHFRPHDPXFK bigger concern than recession. What is certain is that economic performance seems set to remain divided for a long time. This is not just the result of the crisis. For all the challenges the current economic divergence must create, it has EHQHĂ€FLDOLPSOLFDWLRQV7KHFXUUHQWGLYLVLRQLQ performance indicates at least the possibility of a deeper convergence of incomes. Our present world divided may ultimately mean a world OHVVGLVXQLWHG7KHUHDUHVLJQLĂ€FDQWXQGHUO\LQJ growth drivers across the emerging world, including a rapidly expanding middle class, rising infrastructure investment and growing business ties along the ‘New Trade Corridors’ linking Asia, Africa, the Middle East and Latin

The business district in Jakarta, capital of South East Asia’s fastest growing economy in 2011, Indonesia, which is due to slow down almost a full percentage point this year. (Image Corbis)

America. These factors are likely to become more pronounced as Europe contracts and US consumers deleverage. CURRENCY DILEMMA 7KH86GROODUPD\EHQHÀWIURPWKH situation in early 2012 in the very near term as the currency performs well in an environment of risk aversion. But on a multiyear basis, this implies a weakening dollar, UHà HFWLQJWKHVLJQLÀFDQWGHEWRYHUKDQJIRU the US economy and continued, gradual GLYHUVLÀFDWLRQDZD\IURPWKHJUHHQEDFNE\ governments and other international investors. The euro is also expected to weaken VKDUSO\LQWKHÀUVWTXDUWHURIDQGHQWHU a longer-term downtrend as the euro area authorities fail to deliver a co-ordinated and credible strategy to solve the region’s problems. The weaker longer-term outlook for the world’s two largest reserve currencies signals the continuation of the multi-year shift into emerging-market economies and FXUUHQFLHVUHà HFWLQJERWKWKHLUULVLQJUROHLQ WKHJOREDOHFRQRP\DQGWKHLUVLJQLÀFDQWUROH in global trade. The broader trend of investing in liquid, investment-grade emerging-market currencies is expected to continue. MENA OUTLOOK 2012 The Middle East and North Africa (MENA) region is as economically diverse as a region could be, with the Gulf Cooperation Council (GCC) countries facing very different economic dynamics than countries without rich resource endowments. Parts of MENA are LQDVLJQLÀFDQWO\VWURQJHUSRVLWLRQQRZ7KLV is particularly true for the GCC economies, which we expect to show resilience, with TheEDGE

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ECONOMIC BAROMETER

growth decelerating moderately in 2012. Tight credit conditions are set to persist, with Saudi Arabia perhaps being the main exception. While tighter credit will not help growth, it will not be as big a drag as it was in 2009, when credit growth in the region went from an uncontrollable pace to a complete halt. Oil prices are expected to remain elevated in 2012. This bodes well for WKHJRYHUQPHQWÀQDQFHVRIRLOH[SRUWLQJ countries, enabling authorities to adopt FRXQWHUF\FOLFDOÀVFDOSROLFLHVWRVWLPXODWH growth as the West decelerates. The GCC countries, which control more than 40 percent of the world’s recoverable oil GHSRVLWVKDYHLQWHQVLÀHGWKHLUHIIRUWVWRWDFNOH domestic unemployment and other social issues by sharply raising public spending by up WRSHUFHQWVLQFHWKHJOREDOÀVFDOFULVLV while most of them have announced measures to raise salaries, provide more social aid, create jobs for citizens and build houses. The Arab Spring movements and the political unrest sweeping the MENA have focused the minds of GCC leaders. Their immediate response has been to accelerate measures, primarily through an increase in state employment and spending on social issues, housing and infrastructure. These additional spending commitments are substantial and come on top of already H[SDQVLRQDU\ÀVFDOSROLFLHV,Qà DWLRQUHPDLQHG generally in check through 2011, averaging an estimated 3.2 percent, up fractionally from 2010. Key to this was the deceleration in food SULFHLQà DWLRQOHGE\VRIWHUJOREDOFRPPRGLW\ SULFHV%XWœFRUH¡LQà DWLRQKDVDOVRUHPDLQHG low, at around two percent. Another year of solid economic growth and an improvement in monetary conditions across the region could SUHVDJHDVOLJKWSLFNXSLQLQà DWLRQLQ to 3.8 percent. Given regional currency pegs, the six percent strengthening of the US dollar trade-weighted index in H2 2011 will help cap œLPSRUWHG¡LQà DWLRQWKURXJK GCC oil production was up close to 10 percent in 2011 as output was raised to offset the loss of Libyan output because of the war. 6DXGL$UDELDZDVWKHPDLQEHQHÀFLDU\ZLWK output up more than 12 percent, but, with Libyan oil now returning to the market after WKHHQGRIWKHFRQà LFWVRPHFRXQWULHVOLNH /LE\D7XQLVLDRU(J\SWZLOOVWDUWEHQHÀWLQJ

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TheEDGE

Like many of its GCC counterparts, Qatar is set to experience further economic growth in 2012 – unlike many other parts of the world, including Western countries such as the UK and US, as well as China and India. (Image Getty)

again from their oil exports. Aggregate GCC non-oil growth is projected to rise to 4.7 percent this year and hold at close to this rate through 2012. This, combined with oil production should raise GCC aggregate real GDP growth to six or seven percent. A breakdown showed Saudi Arabia, the world’s oil basin, boosted crude output from 8.23 million barrels per day (bpd) in 2010 to an average 9.25 million bpd in 2011. It expected production to shrink to nine million bpd in 2012. The United Arab Emirates production rose from 2.3 million bpd in 2010 to 2.51 million bpd in 2011 and is projected to fall to 2.35 million bpd in 2012. Kuwait’s supplies grew from 2.3 million bpd to 2.47 million bpd and will likely fall to 2.35 million bpd. FULL SPEED QATAR Qatar, a small OPEC oil producer but WKHZRUOG¡VWRSOLTXHÀHGQDWXUDOJDV /1*  supplier, produced 0.8 million barrels per day in 2010 to2011 and the level seems set to remain unchanged in 2012. The Qatari economy looks set to have registered another year of rapid growth in 2011, driven by further expansion in LNG production, elevated oil prices and increasing output in the non-oil sector. Qatar is also making headway, however, in utilising and marketing associated products including gas to liquids (GTL) and natural gas liquids (NGL) projects as well as downstream processes such as petrochemicals and fertilizers. Meanwhile, a concerted effort is being undertaken to diversify and develop the non-oil sector, as articulated in the National

Development Strategy 2011-2016 and the broader Qatar National Vision 2030. Spearheaded by spending in excess of US$125 ELOOLRQ 45ELOOLRQ RYHUĂ€YH\HDUV US$65 billion (QR237 billion) of which will be directly funded by the government, infrastructure investment (including World Cup 2022 development spending) and manufacturing will drive non-oil sector growth DORQJVLGHĂ€QDQFLDOVHUYLFHVWUDGHDQGWRXULVP Given the current dynamics of Qatari output, real GDP growth is therefore projected to be 9.8 percent in 2012. Nevertheless, with oil production high and prices remaining above the US$100 (QR364) per barrel mark, the GCC will see a further \HDURIĂ€VFDODQGFXUUHQWDFFRXQWVXUSOXVHV possibly in the range of 10 percent of GDP for the region as a whole. This will once again see the region stand out in a year of austerity DQGGHĂ€FLWVHOVHZKHUHLQWKHZRUOG The primary downside risk to the outlook is a sharp fall in the price of oil due to a greater than expected slowdown in the global economy driven by eurozone turmoil. Geopolitical tension is another factor that could affect the outlook, especially since the MENA region is on a spree of major political changes and power struggle issue. This typically leads to a higher oil price, which may offset, or even dominate negative spill overs. Indeed, in a ‘two-speed’ global economy, when the half of the world is facing liquidity issue, the other half will have one major challenge: deciding how to invest these surplus revenues safely, given the uncertain global economic outlook.


The Edge Feb 2012 Economic Barometer Two Speed Economy