Dr Jarmo T. Kotilaine
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GCC Economic Monthly
The strength of the ongoing economic recovery is in renewed doubtfollowing the growing intensity of the sovereign debt crisis in Europe.While this is undermining sentiment globally in its own right, it has alsohighlighted the limitations of government stimulus spending and forced asignificant number of countries to embark on fiscal consolidation at avulnerable time. For the GCC, the crisis injects another dose of uncertaintyfollowing a fairly lackluster recovery to date.
The relapse in the global economy underscores the excessive relianceon anti-cyclical measures to address a structural crisis.
Althoughgovernment stimulus measures were highly effective in containing thedownturn, frustratingly little progress has been made in addressing theunderlying structural problems: high leverage levels, global imbalances, andineffective bank intermediation.
The Euro-zone risks repeating the Japanese scenario unless timelyefforts are undertaken to revive the structural drivers of growth.
Thegreatest risk under the circumstances would be a persistent addiction togovernment spending. While this can help support economic activity to anextent, major supply-side reforms are needed to prepare Europe for itspending demographic transition.
The GCC region remains vulnerable in the face of the troubles in theWest.
The EU is not only a large trading partner for the Gulf countries, butalso responsible for large proportion of foreign capital inflows into the GCCeconomies. Further, a renewed slowdown in the West would adversely affectthe oil prices and broader sentiment, thereby weakening the growth prospectsof the Gulf countries. Under the circumstances, we reduce our Saudi headlineGDP forecast for 2010e from 4.0% to 3.8%.
Nonetheless, the region remains resilient and well positioned even fora protracted downturn.
In spite of increased government activism, GCCgovernment debt levels remains internationally low. Further, higher oil priceshave left the GCC governments flush with large reserves which they caneffectively utilize in supporting aggregate demand.
Exhibit 1: Saudi Arabia macroeconomic indicators
Real GDP (%) 184.108.40.206.84.24.4Hydrocarbon (%) 0.55.0-220.127.116.11.1Non-hydrocarbon (%) 18.104.22.168.84.24.5Nominal GDP (%) 7.121.9-22.214.171.1242.4Inflation (%) 4.09.95.14.24.65.0Current account balance (% of GDP) 24.9126.96.36.199.815.8Fiscal balance (% of GDP) 12.434.1-188.8.131.52.5
Source: SAMA, NCBC Research