Just where has the Middle East business cycle got to?

Reading the business cycle is vitally important but futurology is a very imperfect science. There are historical precedents and patterns, and an overwhelming mass of economic data. It's also useful to follow what the most successful businessmen do, as success in the past is a good guide to success in the future, though not always.

So where is the Middle East business cycle today? Much depends on what happens to the oil consumer nations. If they continue their economic recovery then oil revenues will continue to grow, fuelling regional GDP growth. If their economies begin to falter under the weight of high oil prices and huge mountains of debt, then the knock on effect will be a slowdown in the Middle East, with a time-lag of up to 18 months.

Stock markets tend to look about 18 months into the future, and it is interesting to note that the most ebullient of Gulf stock markets in Kuwait has lately run out of steam. Stock prices in Kuwait have actually fallen, very slightly, so far in 2005. However, both the UAE and Saudi bourses have continued upwards, admittedly with much higher volatility suggesting a top could be near.

Are we then beginning to see regional stock markets anticipating a recession in the industrialized world? You don't have to look far for proof that this is happening. Japan has now officially entered its fourth recession in recent years, and Germany does not seem to be far behind. Could it be that the UK and US will be next?

To pick another market indicator: the inverted yield curve phenomenon now emerging in the US - where higher short-term interest rates cause long-term rates to fall - tends to suggest a recession is on the horizon. Many senior US businessmen privately also think a recession is close though stock market commentators remain bullish.

Forget about strong growth in demand for oil from China and Asia if the US economy trips up. The collapse of the US as an export market would result is a sharp recession for the overheated Chinese economy in particular.

For the Middle East this would just be a repetition of a business cycle that has been seen many times in the past. High oil prices have always caused recessions which then lead to a lower oil price and an economic crunch for the Middle East.

However, it could be that supply side constraints will be somewhat different this time, and that the oil price will tend to remain rather firmer than in previous recessionary environments.

In the late 1970s the industrialized countries experienced an extremely painful recessionary period while oil prices remained stubbornly high, and that could be the pattern in the mid to late 2000s.

All the same, those business planners who assume that exponential growth trajectories can be drawn for the future in the Middle East should begin to try to come down to earth. That is what local stock markets in the Gulf States are indicating, and going against the market is the one sure way for any businessman to loose his shirt.