Four Macroeconomic Themes Shaping The Rest Of 2019
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As a macroeconomist who now runs a data and research startup, I find myself constantly looking out for signals or policy actions that may impact my business in the UAE and the wider GCC. This helps me take a cognizant approach to profit maximization by making informed decisions around variable expenditures and choosing the market focus for business expansion or otherwise.
Times have been tough for businesses in the past few years. Consumer demand has been fragile, oil prices have been tumbling lower since 2014, thus affecting overall liquidity situation. This, coupled with the US Federal Reserve tightening interest rates, has resulted in the rising cost of capital adding to a local entrepreneur’s woes.
Looking ahead into 2019, more specifically to the second quarter of 2019, we believe that there have been winds of change in the overall macroeconomic environment that businesses in the UAE are operating in. There are early signs of a more favorable economic and policy environment that is probably getting less attention due to the noise of bad news flow.
The following are the key themes that will impact businesses in the second quarter and broader part of 2019:
1. Business sentiment to be weighed down on bad news flow Let’s face it- sentiments are not entirely data or fact-driven. Consumer sentiments have taken a beating on bad news flow, particularly on developments in the labor market. We expect to a see a continuation of this trend in the second quarter, as well as businesses consolidating their expenditure. Monthly Purchasing Managers’ Index (or PMI) reports indicate that firms have been reducing output prices, which indicates a loss in pricing power, a sign that demand has been fragile, and business sentiments are weak.
2. Technology is raising efficiency but also affecting traditional jobs growth The fourth industrial revolution has been accompanied with technological advancements that have increased output by automating all that can be automated. Across industries, we are experiencing more efficient ways of doing business, from digital bank branches to using augmented reality in retail, to the proposed hyperloop for freight or passenger transit. In the short run, this means fewer jobs in some traditional sectors, which results in poor anecdotal evidence on the overall employment situation in an economy. We are, in fact, experiencing this phenomenon in most parts of the world, where low consumer sentiment has been largely driven by the above stated factors. What is missing here is the big picture of job creation of a new and non-traditional variety of careers like data scientists, customer analytics specialists, machine learning, and artificial intelligence managers, among others. All in all, we expect job market to get better going forward, but it may not look better, due to the bad news flow around downsizing in traditional jobs in almost all sectors/industries.
3. Cost of capital is not going to rise significantly from here Since the UAE Dirham is pegged to the US dollar, the American Federal Reserve’s tightening of interest rates implies a consequent tightening in interest rates by the Central Bank of UAE. The consensus is that interest rates have probably peaked, and the Fed would likely keep rates on hold for the rest of 2019. For the UAE, this essentially means that the cost of borrowing for businesses is unlikely to climb any further. On a positive note, a sustained rise in oil prices will likely to help the overall liquidity situation in the economy, which can catalyze economic activity via the private credit channel.
4. Expansionary fiscal policy to bolster GDP expansion in 2019-2020 The International Monetary Fund forecasts the UAE to witness acceleration in GDP growth both in 2019 and 2020 based on higher fiscal stimulus related spending on infrastructure. Additionally, Abu Dhabi announced a US$13.6 billion stimulus package to bolster job markets and SME growth last year, which has already seen deployment with the formation of Hub71. All these factors along with the Expo 2020 related spending is expected to buoy economic activity in the coming quarters.