Is Middle East business confidence too high?

Business cycles have fascinated economists for thousands of years. All markets can be observed to move in upward and downward waves. But the position of the wave is often only clear after it has moved on. Trying to establish where the business cycle is positioned is as much an art as a science.

However, we can note that 2004 was a very good year for both oil producer and consumer nations, despite the emergence of $50 plus oil prices.

This year the good times continued, but now some cracks are beginning to emerge in the industrialized economies. 'Slowdown' and 'soft-patch' are the words often used, or in the case of Italy, a 'technical recession'.

At the same time business confidence in the Middle East has taken off in 2005. This has propelled local stock markets into near vertical share price appreciation - a phenomenon that has only begun to show signs of running out of steam in the past month. At the same time, the number of new project announcements, and their size, has mushroomed.

Businessmen and women in the Middle East look exhausted but happy. Businessmen and women in the oil consumer nations look worried!

In terms of the business cycle then, it seems as though the oil consumer nations may have entered a retraction phase, possibly ending in a recession. After all, no oil price rise of the kind we have just seen has ever ended without causing a recession in consumer countries.

However, the Middle East business community should also now take stock of what is happening. It is easy to become over-optimistic at this stage in the business cycle. For where does the money come from that is fuelling the current economic boom?

Well, who is buying the oil? Answer: The industrialized nations whose economies are slowing down! This clearly means that the demand for oil is going to drop sometime soon and that will impact on the price obtained by the oil producers.

Eventually, less oil will be sold at lower prices, and the oil producer countries will suffer a reduction in liquidity. This will be all the more painful to those nations that have over-invested during the boom phase; for them the demand for cash to finish big projects may come just as the excess oil revenues dry up.

This is not to say that the next two to three years are not an outstanding opportunity for trading in the Middle East.

However, business planners should perhaps start to pay more attention to the remorseless business cycle which has caused more business collapses in history than anything else. The price for over-optimism can be a high one.