The Effect of Changes in the American Economy on the Arab Economies
Jawad Anani Al-Hayat - 05/02/07//
It will come as no revelation to anyone that the American economy, ever present on the international scene, is of major importance to the international economy, in general, and for the economic indicators of the Arab World, in particular. The key indicators that must be followed from an Arab and Gulf perspective are: the dollar exchange rate, the record for stock exchange (NASDAQ, Dow Jones, among others), consumer confidence and, of course, its external balance as represented by the trade balance (the difference between the imports and exports of commodities), and the internal balance as represented by the deficit of governmental expenses against revenues. The indicators point to the fact that these facts and figures portray a contradictory picture, something that will not sit well with the analyst who adores simple, final, clear-cut results. This is like consumer confidence in the US, for instance, which is still high, while people are continuing to pounce on immediate consumption at a high degree.
At the same time, there are two facts that are affecting this indicator. First, the demand for housing and real estate went down by 8% during 2006 compared to 2005. While some analysts expressed their optimism at the end of last year about the real estate market regaining some of its value, this did not take place. Instead, they came to expect or even worry that the value would continue to recede a great deal this year, especially if the Federal Reserve raises interest rates.
The second negative matter is that the rising rate of consumption has forced savings rates in the US into the negative (-1%), which means that consumers, or citizens, are spending more than they earn and that they are in debt to banks and financial institutions. This continuous decline in savings rates is an economic ticking time-bomb that bodes ill for the future, as the chairman of the Federal Reserve Ben Bernanke has said.
If we look at the index of labor, we see that the American economy convincingly created additional job opportunities last year, and that the unemployment rate has not exceeded 4.3%. But on the other hand, the major companies that are experiencing problems such as the auto-manufacturers (Ford in particular), with manufacturing firms beginning to restructure themselves, getting rid of the tens of thousands of their employees. However, in spite of this, the growth rate achieved by the American economy for the last quarter of 2006 reached more than 3.4%, which is a high growth rate. This is especially the case if you calculated based on the first half of the same year when GDP growth only fell to 1.5%. The assumed reason is the decline of the price of imported oil.
As for the stock exchange, it is obvious that it regained its health at the end of last year and early this year, recovering the buoyancy it enjoyed during the 1990s, achieving levels that have not been seen for years. Then again, if oil prices begin to move again, or interest rates rise, it is certain that this recovery will not last for long. This is especially since at the end of the week the bourses of Europe recorded levels that they did not experience over the past six years.
As for the balance of payments and the balance of the government (the deficit in the budget), they still remain politically and economically a headache for economic planners. The US is suffering from a worsening external and internal deficit, with escalating numbers, something promoted by the cost of the war, declining external competitiveness, and the growing consumer demand. In the face of these facts, the US' debt will expand, with many more dollars issued to the euro market.
The question in this context is: can the dollar possibly remain as it is? Is the US not interested in reducing the price of its currency? Can the policy of rising interest rates reduce consumer demand, increase savings rates and entice foreign investors to deposit their financial surpluses, in dollars or in any tool within the US debt? Should it be the case, the dollar will improve, but the cost of production and the cost of American investment will both rise. This may be acceptable if the level of good unemployed money can viably retreat without rocking the political boat for the Republicans. We will see analysts in the Arab World divided among themselves over answering these questions that concern Arab businessman: will the value of the dollar decrease along with the Arab currencies pegged to it? Are Arab central banks supposed to redistribute their foreign exchange reserves away from the dollar toward the euro and the yen, especially since the latter has began to rise?
Some are betting that the American economy is strong and insusceptible to destabilization, especially in light of American technological superiority. Others say that the American economy will pass over a restructuring phase for several years; a period that will see a decrease in the exchange price of the dollar. A comprehensive reorganization of the many productive facilities will also take place, especially in the auto-industry, aircraft manufacture, and in the transportation, communications and aviation sectors. This adjustment period will also witness a decline, like the one experienced in the 1970s and the early 1980s, before the American economy enjoyed a period of recovery that lasted more than ten years at the end of the last century.
This is an issue that demands careful studies by economic decision-makers in the Arab World. But politics may have another opinion during this particular time. Indeed, but to what extent can we lose economically to preserve our good relations with America?
* Mr. Jawad Anani is an economic expert at Al-Basira Consultants
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