GCC countries to grow 5% on non-oil real GDP basis Economies remain relatively buffered

KUWAIT CITY, Dec 24: As investors prepare for 2013, a new year it shall be, though the overall environment will be little changed. Realism dictates that, although a few things are different or improved here and there, we remain for the most part in a familiar environment. The economic growth numbers remain soft and vulnerable for the advanced economies, and the old risks are still with us; lessened perhaps, but still as hard to quantify or assess.
Greece remains in the headlines, though fears of its consequences have faded and its latest “bailout” package or payment is on the way. The EU continues to schedule almost monthly summits, where progress is made but at painstaking pace, most recently on banking union. Growth continues to hang tough in China where we seem to have avoided a hard landing, and where growth is expected to top 7.5% in 2013. The US is described as “better than the EU”, the latter being currently in recession and expected to post further negative or flat growth in 2013.


Whether one agrees with their actions or not, kudos have to go again to authorities, particularly central bankers, in the advanced economies for convincing investors, yet again, of their unyielding determination. Quantitative easing, QE or the massive purchase of assets in a zero rate environment, is expected to be the norm ahead in the US, Japan, UK and, under some form, in the EU as well. At its last meeting in December, the Federal Reserve went beyond its usual policy statement by communicating that: it is targeting a 6.5% unemployment rate (currently 7.7%); it did not expect to see such a level before 2015, and therefore would be stepping full blast on the QE/gas pedal, unless inflation threatens to rise above 2.5%, which is currently not foreseen by the Fed. That is another step up by the Fed and likely to encourage or soothe all the other central banks, currently restrained, by tradition or rules or the fear of new policies. FX rates seem driven or influenced by the notion that the major central banks will follow the Fed’s lead. The general assessment that we share, again this year, is that the emerging markets/economies will outperform, and that their currencies and bonds will as well. The advanced economies ought to grow 1.5%, with a “flat” Europe and a near-2.0% US, though the latter estimate ignores the risk of the fiscal cliff. The IMF expects Asia to grow 5.8%, the MENA region 3.6%, though again all these numbers presume no major crisis gets out of the hand in the year (EU/fiscal cliff/other).

Downside

The risks are, in 2013, primarily on the downside, especially before the fiscal cliff issues in the US are resolved (or postponed long enough). Recall that the fiscal cliff is a combination of tax hikes and spending cuts that automatically kick in on January 1-2, should the two political parties in the US fail to come to an agreement on how to reduce the current and future deficits, put US debt on a sustainable path, and in the process pass a new debt ceiling resolution. The last time we encountered the debt ceiling issue (and the possibility of a US delay/default), the country lost its AAA rating from one of the leading rating agencies.
Going over the cliff itself, i.e. if nothing is done on the matter by January 1, could subtract almost $600 billion from the US economy over a short period of time and guarantee a recession during the first half of 2013, if not longer. $600 billion is the average annual addition to GDP in the past 3 years. The hope is that some agreement, at least partial, on taxes and cuts, would reduce the hit to GDP from 4% ($600B) to something under 2%, which combined with the good news of a longer-term solution would prevent a recession.
In a context similar to the previous two years, we expect the GCC economies to remain relatively buffered and to continue to benefit from their very strong balance sheets that allow government spending on both workers benefits and on infrastructure spending. The GCC countries should grow about 5%, on a non-oil real GDP basis, and we expect oil prices to stay close to $100 pb, thus keeping these countries budget finances in surplus territory.


 

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