Following a recent trip to the Abu Dhabi, Dubai and Bahrain, Charles Davis, Cebr’s Head of Macroeconomics, reflects on the economic outlook for the region:

 

“The Middle East economy is expanding at a pace we can only dream of in the UK. However, after two years of breakneck expansion in economic activity there is no doubt that the economy is slowing down in 2013. While Middle Eastern economies are trying their best to diversify with incredible investment in infrastructure, the oil economy is slowing in 2013. The effect on the regional economy is a reminder of how much further the region has to go to break away from its reliance on oil and ergo the wider global economy.

 

Across the region, it is hard to ignore the pervasive youth unemployment problem. The World Economic Forum meeting on the Middle East, which took place in Jordan while I was in the region underlined concerns that not enough is being done to address the highly damaging pervasive joblessness across the Middle East. Speaking to businesses, there are real challenges emerging from government attempts to deal with these problems; on the one hand governments press ahead with policies which favour the employment of nationals rather than the migrant labour that many Middle Eastern economies have traditionally taken advantage of but on the other hand, businesses report substandard qualification and skill levels among local job market candidates. Hence, it is difficult for businesses do get the right balance of skills for their organisation to flourish. If Middle Eastern businesses are to move up the global value chain and high value added service sectors are to flourish then governments need to make sure their human capital as well as the physical capital is first class.

 

Looking at the bigger picture, Middle Eastern countries don’t necessarily see shale gas as much of a threat as one might have expected. Shale Gas is likely to bring down the price of oil but there is likely to be a floor to how low prices can go since the cost of extraction is so high. An oil price of $80 a barrel still leaves ample profit margin for the Middle Eastern crude, which is remarkably cheap to extract. The emergence of shale gas appears to be a real blow to the economics of  renewable energy, at least in the short term. Hence, there is a view in the Middle East that shale has if anything could prolong the oil era. I still don’t think this takes away the need for major reform in the Middle East. As our most recent ICAEW Economic Insight report highlighted, energy subsidies in the Middle East are an order of magnitude higher than across the rest of the world. This not only creates massive, hard to reverse spending commitments that are future liabilities for Middle Eastern governments, but also distorts economies so that highly inefficient activities such as burning oil for energy take place. As in many aspects of economic policy, the United Arab Emirates are leading the way within the region, with investments in nuclear power stations built by the South Koreans and a massive solar energy station in the Abu Dhabi emirate. But overall it strikes me that a lot more needs to be some to make sure price signals are working properly and a more efficient allocation of resources takes place.”

 

Charles visited the Middle East to speak at events launching Cebr’s most recent Economic Insight: Middle East report for ICAEW. For more information and a copy of the report, please visit ICAEW’s website.