How strong is the economic outlook for business in 2006?

Otherwise the view of a shift into a global economy characterized by stagflation - high inflation and low growth - was half right. Inflation certainly did rise sharply in the second half on the back of even higher oil prices, but growth continued to be strong in the US and picked up in Europe, only stumbling in the UK.

The impact of high oil prices on GCC inflation was just as acute as we forecast: Dubai rental increases of 25% in 2004 were followed by 38% in 2005. For 2006 this prediction is easy: 15% which is the maximum allowed under a decree from Crown Prince General Sheikh Mohammed bin Rashid Al Maktoum.

Inflation not dead

However, the theme for 2006 will surely be some upward movement in inflation globally - maybe courtesy of still higher oil prices. People forget that planned oil maintenance has been put on hold for two years to support current output, and Abu Dhabi, for example, is pulling 150,000 barrels per day from the market as soon as next month due to maintenance.

At the same time higher US and even EU interest rates will surely begin to impact on growth, along with higher energy costs which are a tax on consumers. So we will have higher inflation and lower growth; now that does begin to look like stagflation.

In the GCC states, and especially the UAE and Qatar, hyperinflation may be nearer to the mark. Labour costs are beginning to take off as skilled expatriates are in short supply, and higher wages are needed to compensate for falling standards of living due to high rents; and UAE nationals could well be up for another 25% salary rise courtesy of the Government responding to inflation again.

The problem with inflation is that higher and higher business costs are difficult to balance against cash flow even if there is higher revenue. This is the classic over-heating economy, and symbolized by the traffic jam, a common phenomenon today in some GCC cities but not seen three years ago.

GCC overheating

So business life may not be easy even in a boom, particularly as competition for scarce labour adds to the workload of those remaining employees. Late-cycle staff also tend to be the poorest quality of adventurers, more trouble than they are worth.

That said the booming economies of the GCC look like comfortable picnics by comparison to the harsher environment of economic slowdown and higher inflation in the industrialized world. This means down-sizing, cost-cutting and consolidation in a falling marketplace.

Perhaps as GCC businessmen sit in their cars fuming at the antics of their multicultural friends, they should spare a thought for their colleagues in the North American car industry, for example, trying to decide how to fire 20,000 or more staff to meet tight cost budgets. It is not hard to see who will have the better 2006.