One of the biggest threats facing the world’s economy is the resurgence of inflation, due, not least, to the imposition of President Trump’s tariffs and the potential for a global trade war. This could have profound implications for the economies in the Middle East due to the trade measures’ impact on international flows of goods as well as their effect on domestic demand.
The Gulf States have been a major beneficiary of decades of globalisation, resulting in the development of a highly successful transport and logistics sector. However, a dependency on flows of trade and finance can be a double-edged sword, meaning that the region is exposed to disruptive trends in times of global instability. Inflation is one such economic risk which could impact not only the volumes, origins and destinations of goods flowing through its ports and airports, but also consumer buying patterns as the cost of living in the region rises.
The International Monetary Fund (IMF) made this clear in a paper following the Covid-19 pandemic. ‘Given the high correlation between inflation in the Gulf Cooperation Council (GCC) and its main trading partners, we expect that inflation abroad will be one of the main drivers of inflation in the region.’ As the GCC imports so many vital consumer goods, pharmaceuticals and construction materials, this ‘trade openness’ will result in the importation of inflation caused by tariffs and rising costs on the world market.
What is more, currency volatility plays an important, although less appreciated, role. The currencies of 5 out of six GCC members are pegged to the dollar (Kuwait being the exception), which since President Trump’s decision to levy tariffs on many imports has come under sustained pressure. This year, it has already fallen by 8.4% against a basket of international currencies. The Federal Reserve is also coming under more pressure to cut interest rates to stimulate the US economy and this will also have the effect of weakening the dollar further. In practical terms, higher prices will not only reduce consumer demand but will also make infrastructure projects more expensive, eventually impacting on the volume of imported goods which transit the region’s ports and airports.
Whilst a weak dollar will reduce imports from countries with strengthening currencies, such as Japan, UK and the European Union, the better news is that the dollar has remained flat against the Chinese renminbi. The changing currency environment may mean that GCC importers look to source more product from this market as goods elsewhere in the world become more expensive. This will consolidate China’s position as the GCC’s largest trading partner and provide a boost for growth for sea and air cargo carriers on this trade.
Inflation is also being caused by domestic pressures. The region has proved hugely popular for wealthy migrants moving from Europe – especially the UK – in search of a better standard of living and lower taxation. This is placing pressure on real estate increasing prices and rental yields and existing middle income residents may find that they are squeezed by the new wealthy incomers. This in turn could limit their spending power and reduce demand for a whole range of consumer goods and services. Express and logistics companies serving the region’s consumers should be prepared for headwinds as a greater proportion of disposable income is spent on housing and accommodation rather than products.
It is not all bad news. The increased cost of Chinese imports in the USA will inevitably result in Chinese exporters seeking new markets and this will provide a boost for Asia-Europe/Africa/India/Middle East traffic, with the GCC hubs benefiting. Ironically, in a more benign scenario, the barriers to trade with the USA could have a deflationary effect elsewhere. Chinese manufacturers have already been struggling with weak demand in their home market and will be keen to find new customers for the products which become priced out of the US market. Whilst good in the short term, this trend is unlikely to last for long before Chinese output restructures to take into account global prices. Weakening Chinese output will have a longer term negative impact on global GDP which in turn reduce volumes transiting the Gulf. Prospects could be worsened if the EU reacts to Chinese ‘dumping’ of goods by imposing tariffs in order to protect its own manufacturers.
Of course, there is still time for the new US administration to agree trade deals with China and the rest of the world which mitigate the impacts of tariffs, reduce inflation and strengthen the dollar as the US economy gets back on track. For the time being, though, volatile policymaking is resulting in uncertainty on the world markets with inevitable consequences for the business environment.
Author: John Manners-Bell
Source: Ti Insight
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