Once again, the collective wisdom of the global stock market has pre-empted official economic readings.
After a breathtaking rally that lasted just about a year, the global equity markets peaked in mid April. Yet only last week we received formal confirmation that GDP in the US had slowed substantially. The big question now is whether we face a double-dip recession. The good news is that even with important leading indicators auguring further slowing of the major economies, it is unlikely we will encounter the rare event of a double dip, unless policymakers err. The bad news is that in the unlikely event of double trouble, we will have little left in the line of traditional instruments to fight it.
First, by way of definition, a double dip should be defined as two recessions following each other within a very short period. A softening of growth during the recovery phase is not a double dip. The business cycle does not develop in completely straight lines. Recoveries see changes of pace, as do downturns.
The cycle-dating committee of the national bureau of economic research, a private organisation based in Massachusetts, has not yet formally called an end to the US recession that started in December 2007. Presumably, at some point in the next couple of months, the committee will announce the recession ended some time last year.
On the traditional definition of two consecutive quarters of negative growth, the US recession ended in the third quarter last year, as did the recession in the euro zone. A new recession within two years or so would certainly have to be considered the second recession of a double-dip trajectory.
While many people talk about double dips, these do not occur often. In the US, the only post-Second World War double-dip recession occurred in 1980-1982. Germany experienced a double dip in 1993-1995, and Japan in 1997.
So what has caused recent weakness in economic data? Coinciding factors have contributed to a weakening of the global recovery. First, in a number of countries, fiscal policy has become restrictive. This is the case in China and to some extent in a number of European countries. Even where policy has not yet become restrictive, the positive effects of earlier stimulus measures are fading. Second, while companies will continue for some time to rebuild inventories, the biggest impact in terms of economic growth is probably already behind us. Third, the expiration of the generous tax credit for US first-time homebuyers at the end of April is leading to renewed weakness in housing.
In 1980-1982, monetary policy certainly played a big role in causing consecutive recessions in the US and elsewhere. The Fed raised its federal funds rate to 20 per cent in early 1980, which was sufficient to trigger the first recession. The Fed then eased spectacularly, bringing the rate down to 9.5 per cent by July 1980. This easing surely helped to start a recovery. But no sooner had the recession ended than the Fed raised rates again, to 18 per cent by the end of the year, presumably contributing to the second dip into recession that started in July 1981 and lasted until November 1982.
Such a spectacular course of monetary policy is not going to be reproduced this time. Those fearing a double dip cite US housing, restrictive Chinese policies and European fiscal consolidation as the most likely triggers. The double dips in Germany and Japan were also "man-made". In both cases, fiscal tightening pushed the economy into its second dip. Commentators therefore generally argue that double dips are caused by policy mistakes.
Will China, now officially labelled as the world's second-largest economy, experience a hard landing? Such fears seem unwarranted. Chinese policymakers provided tremendous support to economic activity during the global downturn starting in 2008. Economic growth indeed accelerated, and lending, money growth and house price inflation increased. Subsequently, policymakers have changed direction. They have taken very specific measures to ease lending growth and to slow the housing market.
The policymakers seem to be successful: the economy is slowing, but at a pace that the authorities probably desired. Inflation has picked up this year. But there is no reason to panic on that front. Headline inflation fell back in June to 2.9 per cent while non-food inflation was stable at 1.6 per cent, not exactly levels to trigger overly aggressive further tightening.
Will fiscal consolidation trigger a double dip in Europe? Much more so than in the US, European governments have already started the process of fiscal consolidation. This will certainly have an impact on economic activity in the short term. We estimate that fiscal policy will be contractionary next year to the tune of about 1 per cent of GDP. This is not sufficient to trigger a new recession. It is therefore too negative to argue that policymakers are in the process of making a policy mistake that will cause a second dip. In addition, the fall of the euro is an important compensating factor. As a very rough rule of thumb, a 10 per cent decline in the trade-weighted euro should contribute 1 per cent to GDP growth.
What are leading indicators saying? The manufacturing index of the institute of supply management (ISM) has been a fairly good indicator for signalling a recession. The ISM index has to fall to about 40-45 to reliably signal an approaching recession. While the index has fallen in recent months, at 56.2 in June, it is also a long way from recession territory.
After the recessions of 1990-1991 and 2001, the ISM index weakened after its initial rise. In both instances, the index fell to just above 45. In both cases, the recovery was weak, but in neither case did a double dip occur.
The most striking piece of economic data in recent days was the strengthening of business confidence in Europe last month. The purchasing managers indexes for the euro zone improved, particularly thanks to the spectacular improvement of German business confidence. This was also reflected in the Ifo Institute's business climate index, which rose from 101.8 in June to 106.2 last month, the highest level since July 2007. Another important indicator is corporate profits. Currently, the profit cycle is still gaining altitude. The reporting season for second-quarter company results has so far exceeded expectations in earnings and sales. We expect strong earnings to continue in the near term. The earnings cycle therefore certainly does not signal an early recession.
Economic circumstances are highly unusual, making forecasting even more difficult than normal. A continuation of the recovery, albeit perhaps at a more modest pace, seems to be the most likely scenario. Should this cautious optimism turn out to be misplaced and should the economies of the US and the euro zone fall into recession before too long, the policymakers will have very little left of their traditional arsenal to fight the recession.
They would have to resort to stepping up their use of non-traditional measures, in particular quantitative easing, similar to that undertaken in late 2008. While it is unclear whether such policy measures will make a meaningful difference to generating and sustaining economic growth, earnings and employment, it is clear that such policies will drive up the already high sovereign debt overhang and make the long-term bond market less attractive.
Rehan Syed is the head of portfolio management at the ABN AMRO Private Bank in Dubai. The opinions expressed are personal and are not necessarily those of his employer.
Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
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Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
The specs: 2019 Haval H6
Price, base: Dh69,900
Engine: 2.0-litre turbocharged four-cylinder
Transmission: Seven-speed automatic
Power: 197hp @ 5,500rpm
Torque: 315Nm @ 2,000rpm
Fuel economy, combined: 7.0L / 100km
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
If you go
The flights
Emirates and Etihad fly direct to Nairobi, with fares starting from Dh1,695. The resort can be reached from Nairobi via a 35-minute flight from Wilson Airport or Jomo Kenyatta International Airport, or by road, which takes at least three hours.
The rooms
Rooms at Fairmont Mount Kenya range from Dh1,870 per night for a deluxe room to Dh11,000 per night for the William Holden Cottage.
Company%20Profile
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At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
Company profile
Name: Infinite8
Based: Dubai
Launch year: 2017
Number of employees: 90
Sector: Online gaming industry
Funding: $1.2m from a UAE angel investor
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
The biog
Mission to Seafarers is one of the largest port-based welfare operators in the world.
It provided services to around 200 ports across 50 countries.
They also provide port chaplains to help them deliver professional welfare services.
The biog
Favourite food: Fish and seafood
Favourite hobby: Socialising with friends
Favourite quote: You only get out what you put in!
Favourite country to visit: Italy
Favourite film: Lock Stock and Two Smoking Barrels.
Family: We all have one!
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
MATCH INFO
Burnley 1 (Brady 89')
Manchester City 4 (Jesus 24', 50', Rodri 68', Mahrez 87')
The biog
Born: near Sialkot, Pakistan, 1981
Profession: Driver
Family: wife, son (11), daughter (8)
Favourite drink: chai karak
Favourite place in Dubai: The neighbourhood of Khawaneej. “When I see the old houses over there, near the date palms, I can be reminded of my old times. If I don’t go down I cannot recall my old times.”
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
The biog
Most memorable achievement: Leading my first city-wide charity campaign in Toronto holds a special place in my heart. It was for Amnesty International’s Stop Violence Against Women program and showed me the power of how communities can come together in the smallest ways to have such wide impact.
Favourite film: Childhood favourite would be Disney’s Jungle Book and classic favourite Gone With The Wind.
Favourite book: To Kill A Mockingbird for a timeless story on justice and courage and Harry Potters for my love of all things magical.
Favourite quote: “We make a living by what we get, but we make a life by what we give.” — Winston Churchill
Favourite food: Dim sum
Favourite place to travel to: Anywhere with natural beauty, wildlife and awe-inspiring sunsets.
The specs: 2018 Volkswagen Teramont
Price, base / as tested Dh137,000 / Dh189,950
Engine 3.6-litre V6
Gearbox Eight-speed automatic
Power 280hp @ 6,200rpm
Torque 360Nm @ 2,750rpm
Fuel economy, combined 11.7L / 100km
Our legal consultant
Name: Dr Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
Torque: 859Nm
Transmission: Single-speed automatic
Price: From Dh825,900
On sale: Now
COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
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Our family matters legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
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