With around one third of GDP coming from oil until the recent price collapse, the non-oil sector in the UAE is just not growing fast enough to prevent a recession in 2015. Only a sudden and dramatic recovery in the oil price can prevent it. Recent stock market falls have been for a reason.
How bad will a local recession get next year? At the moment the non-oil sector is on a growth path with strong investment in infrastructure and real estate, mainly by the state and para-state companies. The government will be able to borrow to sustain this business activity but the private sector is almost sure to slowdown its investment in these circumstances.
Oil hub
Besides is it realistic to think that the non-oil sector of an oil-led economy in the middle of the world’s greatest oil region will be unaffected by the recent oil price crash. Where does most of the money come from for Dubai’s tourism and trade? From states that are far more dependent on energy revenues and will feel its loss even more.
The collapse of the Russian currency may be a special case but it certainly has implications. Russians have been among the most important visitors to Dubai in recent years and its biggest spenders.
How long will it take for the oil price to recover this time? It always does. It did from the even worse 1999 price crash, and from 2008 and the Global Financial Crisis. Oil prices will recover again. But what drops like a stone will not necessarily rise quickly like a rocket. Indeed, oil prices may not have reached the bottom yet.
Wall Street is having a party with money being sucked out of slumping emerging markets and oil states, particularly Russia, and back into the land of the free. It is probably the top of a bubble before the less than solid US economic recovery also comes unstuck due to the surging value of the US dollar and its impact on multinational profits.
Global economic downturn
The global economy is poised on a knife edge between recovery and an even more widespread slump. Can a fragile US recovery pull the rest of the world out of a side into depression or will it follow? If it does that will be another very good reason not to be very confident about a quick upturn in the UAE next year.
Could 2015 finally be the year that the overbought US equity and bond markets blow up? Look at the charts and they are on the edge of the cliff, unless there is a dramatic global economic recovery coming that we just don’t see and the oil price – along with all other industrial commodities and the bond markets of the world, is not predicting.
