Will George Soros be right about the US recession after all?

Just to recap on what the legendary multi-billionaire investor had to say: 'I believe the global economy has been sustained by a housing boom that took on the characteristics of a bubble' and he cautioned: 'I expect an initial soft landing to turn into a hard one when the slowdown does not end.

'A slowdown in the United States will be transmitted to the rest of the world via a weaker dollar. That is why I expect a worldwide slowdown starting in 2007.'

Mr. Soros also highlighted another truth: 'The savings of the world are sucked up into the center to finance over consumption by the richest and largest country, the US. This can not continue indefinitely and when it stops the global economy will suffer from a deficiency of demand.'

US slowdown

Is this not what we see in the world today? US GDP growth slowed to 0.6 per cent in the first quarter, with plunging auto and house sales and falling house prices. And average oil prices have come down in 2007 at a time when Opec is pumping less oil, so oil revenues in the Middle East are falling for the first time this century.

This will not cause much more than a ripple in regional business if this proves to be a short term phenomenon as Wall Street presently believes. But what if Mr. Soros' analysis is correct in thinking that this slowdown will not end quickly? He has been right before!

In a real recession commodity prices would tumble as demand fell off. And for the oil price Citigroup has calculated that around $30 of the current price per barrel is sustained by capital market speculation which would drop away in a sustained downturn.

But should oil producing countries be at all surprised by this cycle? Is this not what has always happened in the past? Oil prices rise and rise until the point at which they tip the global economy into recession, and then they fall very sharply.

Longer cycle

The difference this time is that the cycle has been much longer than previously seen. That does not mean that it has gone away but it does make people complacent and over confident. The good times have gone on for so long that it feels like the party will never end.

What would a sudden oil price downturn do to GCC? First, the stock markets would crash to new lows in anticipation of lower profits. Second, the real estate bubble would burst. And thirdly those individuals or financial institutions most exposed to equities and realty would be in serious trouble.

However, there is a big cushion in that all the GCC governments have accumulated massive oil wealth from the boom years of the 2000s, and judiciously spent this would dampen the oil price impact on the local economy.

Also US interest rates would be cut, and that would directly support GCC economic activity as local rates are pegged to the US dollar. So things might look much worse to start with than looking back, although the initial shake-out could be fast and brutal.