Tim Fox: If 2016 was a roller coaster, 2017 will not be an easy ride

Most economic predictions for 2016 proved to be wrong. Markets were battered by unexpected events last January, as oil prices collapsed and Chinese markets went into a tailspin. Things became even more complicated as the US economic recovery slowed down in the first half of the year and the Federal Reserve hesitated about raising interest rates. Of course the UK’s Brexit vote and the Trump election victory in the US were the main surprises of last year, as populist revolts overturned global political elites in the second half of the year.

Against this backdrop, making predictions about 2017 is unusually difficult, as many of the normal assumptions about policymaking are being challenged by newly evolving social and political phenomena.

For our region at least it can be said that 2016 ended better than it began. Unlike last year, oil prices are starting the new year on the rise, helped by the decision in November by Opec to effectively abandon its market share strategy, adopted at the end of 2014, in favour of targeting prices again.

However, oil production cuts are a double-edged sword for the GCC economies. If there is full compliance with the Opec agreement and output is cut back, it is likely that there will be a drag on regional economic growth.

Fortunately, oil production cuts will not be the whole story. Firmer oil prices will also have positive effects on growth principally in the non-oil private sectors. They will also reduce government budget strains that have dominated the economic landscape of the past two years. While a reduction in fiscal pressures may not necessarily translate into a significant increase in government spending this year, the case for further aggressive spending cuts is likely to be reduced.

Higher oil revenues should also help to alleviate some of the liquidity strains in domestic banking systems that were evident in 2016, which should in turn help to provide support for private sector growth.

Within the GCC, the UAE is probably still the best placed of the regional economies. The economy is the most diverse in the region, the fiscal buffers are large and the budget is expected to be close to balance in 2017.

Growth in the UAE is expected to accelerate to 3.4 per cent this year from an estimated 3 per cent in 2016. Within the UAE, Dubai is likely to grow at a slightly faster rate than Abu Dhabi, given an intensification of its infrastructure investment programme ahead of Expo 2020.

In the rest of the GCC the focus will remain firmly on Saudi Arabia and its ability to implement its ambitious reforms. Even so, economic growth in the kingdom is expected to pick up slightly but is likely to remain relatively modest.

Headwinds to growth will also have to be contended with and will come from international factors such as a stronger dollar and firmer interest rates. The speed of both will be dependent on the success of the Trump White House in implementing its ambitious economic plan.

Even though the markets are assuming two to three US interest rate rises in 2017, they were badly wrong-footed by the Fed in 2016 and could well be again. It will probably take a while for the Trump tax cuts to be pushed through and for spending increases to meaningfully materialise. These will have an impact on how quickly the Fed will move to normalise interest rates further. However, it has to be recognised that should the Trump programme be implemented more quickly than expected, the impact on inflation could be quite swift at a time when the economy is already at full employment. Hence a faster pace of monetary policy tightening and of dollar strength cannot be ruled out, which would certainly make conditions for this region more challenging.

Events in the wider world may also continue to add to the uncertainty. Brexit was voted for six months ago, but still the process of implementing it has barely begun. It is also hard to be optimistic about the prospects for euro-zone economies, especially as its largest members face their dates with disillusioned voters. Last year may have felt like a roller coaster, but 2017 may involve global turbulence remaining an ongoing theme.

Tim Fox is the chief economist and head of research at Emirates NBD.

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