Regional financial markets took a tumble yesterday, as knee jerk selling hit equities and fears grew of a downturn. There is no reason for such panic, but there is reason for measured concern. Yesterday’s rush on the Dubai stock exchange, which led to a 6.5 per cent decline in the benchmark by the close of business, should be seen as a warning that the economy has not yet recovered fully from the 2007-08 financial crisis.
Premium stocks including Emaar, Arabtec, Tabreed, Dubai Investments and Union Properties were all significantly down yesterday, with one analyst blaming regional concerns about the activities of the extremist group ISIL. To be sure, the UAE’s geographic proximity to Syria and Iraq has had a negative effect on some investors’ perception of this country, but the market rush is more rightly linked to global trends.
The traditional economic indicators are concerning. Last week was the worst on US markets since May 2012; Brent crude oil hit a two-year low on Friday; the gold price has sunk to its lowest point for 15 months; and, according to the International Centre for Monetary and Banking Studies’ 16th annual Geneva Report, total world debt surged 38 points last year to 212 per cent of global output. One bright note for workers came from the International Labour Organisation’s director-general Guy Ryder, who said late last month that wages should begin to increase – although he could not say when that would happen. And where wages have risen, they have not kept pace with inflation.
Meanwhile, the German economy – the strongest and most influential in Europe – is sluggish, with some experts predicting that the euro zone could fall back into recession. Japan, too, is teetering on the brink of a recession if the economy fails to grow this quarter. The eyes of the world’s economic analysts are now on China, which is due to release data on inflation, trade, credit and money supply this week. Expectations are that the economy will continue to grow, but at a slow rate.
The key, however, lies in the US. Federal Reserve vice chairman Stanley Fischer indicated in a speech at the weekend that the US may defer a decision to lift its low interest rates due to the slowdown in the world economy. Low interest rates have been an important enabler of economic growth during the fallow years, but if they are kept low artificially for too long, they will set back recovery. If the Fed gets it right, then consumption will increase and the regional and world economies will benefit.