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How will the US Presidential election impact Gulf business?

Saudi Arabia: Sunday, October 10 - 2004 @ 11:30

‘Now just hold on a minute,’ I hear a reader in the North-West USA say. ‘Economic growth is running at 4.8% and we are in the second year of a post-Iraq war recovery.’

Unfortunately, this is just a pre-election fix and the US economy is about to collapse back into recession. We just have to look at what is happening now in the US economy.

Monetary growth has stalled. Jobs growth is faltering. Housing equity withdrawals have halved. Tax cuts are over. Debt levels have mushroomed. Meanwhile, the budget and trade deficits have ballooned.

How can this background result in more economic expansion? The bad times are just around the corner. It is just that reality has yet to catch up with the public, which is what democratic politicians who want to be re-elected try to achieve.

As soon as the voters catch on we will see a crash on Wall Street and a plunge in US house prices. Oil prices could well be the factor that causes this sudden reality check.

Where would a post-election US recession leave Gulf Business? Well, for one thing this would tend to correct the demand problem for the oil market and lead to lower oil prices.

Indeed, something that economists have tended to overlook in the rosy glow of US election propaganda is that recessions in the US have always followed period of very high oil prices – like the one we are in right now. This is the natural correction of the market for excessive oil prices.

So how low would oil prices go if the US economy fell off a cliff? This is not something that can be answered with any precision. It would depend on the policy response of the US Federal Reserve which would probably slash interest rates back to ultra-low levels.

However, if the US catches a cold then the rest of the world is also headed for the sick room. Chinese growth would falter quickly. European industry would find exports hit. The housing bubble in many economies would also burst as part of a deflationary spiral.

Much as Japan has struggled to emerge from a deflationary trap – in which falling prices discourages spending – the US will also find that choosing appropriate policy responses is not easy. In Japan ultra-low interest rates never worked as a stimulus and only much more difficult structural reform achieved anything and we are not sure yet whether that is actually working either.

For GCC business – now enjoying a boom driven by high oil prices, infrastructure investment and market deregulation – a tougher market may be just around the corner.

However, the long-term view of the oil market is trending towards higher demand – from emerging giants like China and India – and that supply will only be forthcoming if prices remain high enough to encourage investment, which should be self-fulfilling.

Thus it is not unrealistic to suggest a global scenario where the market for oil remains very strong while the US economy goes through a very rough patch. This would suggest that any impact of a US recession on oil prices would be rather short, and consequently any impact on Gulf business rather transitory.

Indeed, the long-term nature of the major infrastructure and real estate investments now underway in the Gulf region would also act as a counterbalance.

Nobody would down tools on a mega-project just because the US economy was down and oil prices fell back. These huge investments will roll on regardless, and are the true safeguard to regional prosperity for the next few years ahead. And by that time the US would surely have its economy back on its feet.

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Sunday, October 10- 2004 @ 11:30 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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