- Central banks are moving away from quantitative easing, in a change to their monetary policy
- Back-door “helicopter money” will be the short-term solution to support global economies
- GCC countries should set sights at diversifying and balancing their economies
Increasing economic and political instability create a recipe for disaster and increase the possibility of a global recession in 2017, a banking leader warned.
“The higher cost of capital, more political uncertainty, low growth and productivity – this is all the making of a potential recession for the world in 2017,” said Steen Jakobsen, chief economist and chief investment officer at online trading investment bank Saxo Bank.
The chief economist said major central banks, led by the Bank of Japan, are changing their monetary policy, operating less quantitative easing (QE) and pumping global economies through what he called “back-door helicopter money”.
“Theoretically, helicopter money is when someone goes up into a helicopter and throws money all over the economy so everybody get more money to spend,” Jakobsen explained.
“Of course, this doesn’t work because, if you get AED50,000 extra this year, but you don’t get it next year, investments will collapse. So, for helicopter money to work it will have to be in place forever and ever,” he added.
This is triggered by central banks increasingly looking to spark economic growth at a time when organic growth and production are missing or low. Moreover, in a time of political uncertainty and a seemingly global shift to right-wing politics, things seem to be going in the wrong direction, and the Middle East is bound to get affected.
“Our #SaxoStrats forecast is that 2017 is going to see weakness in emerging markets, oil, gold and silver against the rising US dollar. Furthermore, the change in the US central bank’s policy from infinite monetary easing to indirect helicopter money will ultimately raise both inflation and growth, but only through a recession,” Jakobsen said.
When it comes to the Middle East economies, Jakobsen said the region witnessed “significant inflow” into the bond market here, with much of the investments picking up the yield. This was recently evidenced by Saudi Arabia making a record $17.5 billion bond sale on Thursday.
One day prior to the launch, Jakobsen said: “When the yield curve increases, the price of money increases too, which you will see in Saudi Arabia with the launch of bonds. They will pay more than they would have nine months ago in terms of the actual yield, because the price of money has actually increased because of this change to the monetary policy.”
Going forward, with the continuous pressure from low oil prices and budget deficits, the region’s economies should set economic diversification as the ultimate aim, he opined.
“Looking at all the external factors that will influence Middle East economies, my outlook is that 2017 will be a challenging year for the region. The focus locally should be to diversify and balance the economies better,” he explained.