Was 2005 the peak of the business cycle?

The February economic bulletin from Standard Chartered Bank notes that 'a novel concept for the region is the idea of a stock market being in negative territory.' In fact both the Dubai and Abu Dhabi indices are in the red so far this year and so is Qatar.

Standard Chartered Bank's economist Steve Brice reckons that nominal GDP growth for GCC economies are almost certain to slow from the 20%+ rates seen in 2005: 'However, real growth will be protected by still high budget and current account surpluses'.

Stock markets are leading indicators for an economy, even those driven by retail investors like in the GCC. For example, last week's fall in the Emaar Properties' share price in Dubai reflected fears that quarterly profits were on a falling trend, and that new projects in Saudi Arabia might not deliver profits quickly enough to keep profits from falling back further.

Bank profits to fall

There have also been many warnings from local UAE banks that 2005 profits might prove impossible to repeat in 2006 due to lower fee income from stock market related activities. In short the share boom of early 2005 was itself the source of the profits that inflated bank share prices in that period.

Interestingly a similar argument can be advanced in Qatar, and it would not be unreasonable to conclude that the two economies in the vanguard of the current boom might also be the first to experience a downturn in activity. Other booms, such as the boom in Saudi Arabia, took longer to arrive and will therefore drop back later.

On the other hand, even if 2005 is proven to have been the peak of the third great oil boom in the Middle East, there is hardly a slump in prospect. For well-run businesses that have not overextended themselves in the boom times, there is plenty of good trading ahead for a number of years at least.

Liquidity strong

Standard Chartered Bank's bulletin explains the factors supporting GCC economies like massive liquidity and government surpluses, and dismisses the idea that this is all a bubble that could quickly collapse. Essentially this boils down to the reality of a very strong role for the government in the local economy and the availability of cash from oil to keep market afloat.

To take the case of the Dubai property market, Standard Chartered concludes: 'Those hoping for a collapse - that is those who decided not to buy three years ago, may be disappointed', citing a likely collusion of the three main developers and 'moral suasion' by the authorities as factors which would dampen the impact of a downturn.

So there is no need to panic, but 2006 is already looking a harder environment for profits than 2005, and recent stock market upsets are not without reason.