The world economy may be on the road to recovery, but its a rocky one

Economic data over the last couple of months suggests that economies around the world are starting to recover from the impact of the new coronavirus, including the GCC economies.  Global business conditions – as measured by the JP Morgan global composite PMI - registered the first (albeit slight) improvement in six months in July.  Similarly, both the UAE and Saudi Arabia PMIs came in above the neutral 50-level last month, suggesting a stabilization in the non-oil sectors of the region’s two largest economies.  This reflects a recovery in business activity as lockdown restrictions were progressively lifted, although output is probably still well below pre-coronavirus levels. 

Google’s mobility data paints a similar picture: the number of people going into their place of work or to retail & recreation destinations has rebounded from the April lows but remains 20% to 25% below the pre-Covid19 baseline in the UAE and Saudi Arabia.

As always however, the headline numbers can mask some worrying trends.  Even as businesses have re-opened and output has picked up, unemployment remains high and many businesses are still shedding jobs as they seek to contain costs.  In the latest ISM surveys for both manufacturing and services sectors in the United States, employment declined in July even as firms reported increased activity.  Eurozone PMIs reflected a similar trend, as did the PMI surveys for the UAE and Saudi Arabia.  Household spending in the US and the Eurozone is recovering as governments stepped up unemployment benefits and other financial support for households, but in the GCC the loss of private sector employment may weigh on consumer spending in the coming months.  

There are risks to the nascent recovery as well, not least the consequences of a second wave of coronavirus infections which is already evident in parts of Europe, Australia, Japan and several other countries.  US infection rates still remain high, although they have slowed slightly in the last week. This has led to the re-imposition of some restrictions on activity in certain sectors, and partial or total lockdown in some areas. 

Widening budget deficits and rising debt levels could limit the ability or willingness of governments to extend further support for businesses and consumers in the event of a slow and bumpy recovery.  The US budget deficit is expected to exceed -17% of GDP this year, according to Bloomberg consensus estimates, while the total stock of debt will likely exceed 100% of GDP in 2021, up from less than 80% at the end of 2019.  Congress has so far failed to agree on a new stimulus package and negotiations are likely to become increasingly difficult with the presidential election looming in November.  The executive order extending federal unemployment benefits may provide some relief for the 10.2% of the workforce that is unemployed, but this is a temporary fix at best and may be difficult to implement.

In the oil-producing GCC, governments have been hit with the double-whammy of sharply lower oil revenues at a time when additional support for domestic economies was needed.  Budget deficits will widen sharply in the GCC this year as well, and will be financed through a mix of debt issuance and drawing down fiscal reserves.  While oil prices have recovered from their low in April, Brent oil is still 30% lower than it was a year ago, and well below the levels needed for GCC countries to balance their budgets. As a result the room for additional fiscal stimulus to support a recovery is limited, and Emirates NBD expects most GCC countries to cut spending this year relative to 2019, with the UAE being the exception.  The effective tightening in fiscal policy in other GCC countries could also weigh on the speed of any economic recovery over the next six to twelve months.

While there is evidence that the world economy is starting to grow again following the sharp contraction in the second quarter, the recovery is still quite fragile and uneven.  There is a high degree of uncertainty around economic forecasts, with the speed of the recovery dependent on containing the spread of the coronavirus, as well as on continued fiscal and monetary support.

This article was published in Arabian Business on 12 August 2020