Recesssion clouds gather for business in the Gulf States

When the Gulf stock markets crashed last year at a time of exceptionally high oil prices observers said this was a mistake. Yet the markets look likely to have the last laugh as the Gulf enters a technical recession this year with nominal GDP growth turning negative on the back of lower oil output and prices.

It is of course possible that such a scenario will be avoided by a geopolitical event that sends oil prices skywards. The problem then is that few commentators believe an oil price spike would be more than a passing phenomenon, and the fall on the downside would most likely be precipitous.

The onus will therefore be on Gulf governments to get their macroeconomic management right in handling this set back. And if the pessimism about long-term oil and gas reserves is correct then the future still looks bright, with a return to higher hydrocarbon prices merely a matter of time.

Going on and on

Some argue that the correct policy response is simply to go on and on, and use the savings from the good days to see economies over a rough patch.

However, recessions do have a useful function in market economics and that is to sort the good projects and enterprises out from the bad ones. And it goes without saying that a country gets a better future return from backing winners and not losers.

Another response is to consolidate corporate power structures and land the good going concerns with the problems of those whose performance has been less satisfactory. This works so long as the person putting the consolidation together has the best interests of the nation at heart.

But recessions also mean letting some concerns go to the wall. Those who have launched ill-considered projects late in the business cycle should face the music and not be bailed out. They simply got it wrong and may learn from their mistakes.

Economic stagnation

For in business cycles if governments intervene too strongly then the bounce back from a recession may never happen. Japan and its 15 years of stagnation post 1990 is the example often provided.

The Gulf States are smaller economies and more nimble than the Japanese colossus and can afford to see recession as an education process while preserving the best of the boom and a few prestige projects.

Yet Japan it must be remembered also enjoyed huge liquidity and still blew its chances of recovery by trying to do too much to support its economy.

It is, however, a very different environment for business planners accustomed to the continual boom of the Gulf, and those that put their foot on the brakes earliest generally do best in a slowdown.