How long will the Middle East business boom last?

The cities of Abu Dhabi, Doha and Dubai are being transformed. But as everybody knows cranes swinging over any city also mean that an economic bust is around the corner.

There are maybe three main factors driving the present boom in the Middle East in general and these hot-spots in particular. First and most obviously: high energy prices and its incumbent huge liquidity; secondly, economic liberalization of key sectors such as real estate and finance; and thirdly political will from visionary rulers.

Thankfully the run-up in energy prices has been relatively slow and over a period of now more than five years. Thus sudden wealth has not been squandered on white elephant projects; rather a gradual expansion of many economic sectors has been underway.

However, in both Dubai and Doha the concentration of cranes and mushrooming of projects does now look a little out-of-control. In this light the stock market crashes across the Gulf States in the first half of this year might seem prescient rather than merely a function of over enthusiasm by naive investors.

A soft landing?

Of course, stock market crashes do not always predict economic collapses, but they do generally point to an economic slowdown rather than a continuation of boom conditions. What chances then for a soft-landing in the region?

So long as factor number one, high energy prices, holds up then any cyclical economic slowdown will be gradual with huge liquidity available to cushion any corporate failures.

The more dangerous scenario is that a serious slowdown or even outright recession in the US leads to a sharp fall in oil and gas prices.

In the past high energy prices have always been followed by economic weakness in the consumer nations, and this time appears to have been exceptional so far because of the strength of housing markets on the back of low interest rates.

US housing downturn

Over the summer firm evidence has emerged that the US housing market is now entering a downturn, and it could well be that this proves to be the factor that tips the US economy into recession in 2007 as commentators such as George Soros have predicted.

How this effects energy prices will depend on geo-politics but unless there is a significant deterioration in an already unfavorable situation then a weaker US economy would take down the price of oil just as the Asian Financial Crisis did in 1998.

For Middle East business the safest course would surely now be to consolidate gains from the boom of recent years and to prepare for tougher times ahead. It might take longer for the boom to fade than this scenario suggests but nobody thinks it will last forever, and energy prices have always gone down as well as up.