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‘World in the Grip of an Unwarranted Economic Anxiety’

March 2016

By Fareem Chagla

The last one month has seen a sudden change in the gloom and doom which engulfed the globe in the beginning of the year. Stock markets, generally treated as a sentiment indicator, world over have seen a recovery of sorts — oil has breached the $40 a barrel level (Read: Crude Oil Jumps 57%: The Rally That Few Saw Coming) and there are fewer murmurs around China and the bubble it was growing into. Local sentiment too has been buoyed by the change of heart, few have answers to, and suspicion grows around the sustenance of the swing.

We interacted with Dr. Marie Owens Thomsen, Chief Economist, Indosuez Wealth Management, the global wealth management brand of Crédit Agricole group, for some of her thoughts around the same, besides her views around comparatively low oil prices being an impetus towards change and reforms in the GCC.

Dr. Thomsen underlines what she refers to as the ‘Economic Anxiety’ that has gripped the world, which makes a case for disbelief around any greenshoots or positivity. To give an idea, 2008 had nearly 90 countries in what may be referred to as recession – the comparable figure today is 22. The world GDP stands at nearly 3% against the 30-year average of 3.5%. She gives a perspective around this anxiety being an offshoot of a high degree of misconception prevailing around:

  • Majority linking deflation with depression. Differing with this, she highlights the world is not facing deflationary recession but as deflationary expansion.
  • Importance of energy to the world economy. Oil-dependent nations contribution to world GDP is approximately 17%, roughly the same as China. Besides, it must be stressed that a global recession has never been provoked by low oil prices. In an environment where western monetary and fiscal policies are largely exhausted and structural reform is difficult to enact, low oil prices are the one pro-growth factor that has generally supported the positive job creation, higher real income, and low inflation environment which the world’s major economies are experiencing.
  • Banking system going kaput. The exposure the banking system globally has towards the energy is largely exaggerated and fears around the same leading to a systemic crisis are highly pronounced.

On the impact of lower oil prices to the GCC, she highlights “Low oil prices will support the global economy over the short to medium term, while continuing to inflict pain on the oil-exporting countries. Only structural reform is capable of easing that pain and, as such, the low oil price scenario is presenting a huge opportunity for the GCC countries. Reforms do work, and should not be limited to restoring fiscal balances but rather broadened to promoting an efficient allocation of resources in the economy, boost job creation, and nurture non-oil sectors. This will be necessary to restore the region’s GDP growth to the levels it is accustomed to.”

Underlining 3% growth in the GCC, in the wake of dampened oil prices over the last 2 years, as reflecting a higher degree of resilience than expected, the elevated levels of fiscal deficit however do require to be addressed. While she highlights taxes being an ideal way of tackling the same, besides being a source of regular income to the Government, debt issuances remain a viable alternate. For a region with negligible levels of sovereign debt, such issuances would see a high degree of investor interest globally.

Viable reforms coupled with positive sentiment, which reflects in the UAE ranking 31st in the World Bank’s ‘Ease of Doing Business Index’ (she highlights Switzerland recognized world over as being pro-business ranking a close 26) would ensure the GCC continues to move ahead in a new world order.

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