Global growth slowed in 2011 affected by higher oil prices, earthquake and tsunami in Japan, and fiscal issues in developed economies.

Concerns about debt sustainability and solvency of a number of sovereign issuers - particularly in the Euro Area – increased and weighed on market sentiment. Standard and Poor’s (S&P) lowered the US sovereign rating to AA+ from AAA on August 5th, 2011 following a drawn out political debate on reining in budget deficits. This was the first time the US rating was lowered since S&P had assigned the country AAA in 1941. On August 9th, US Federal Reserve announced that it would keep the target range for the federal funds rate at 0% to 0.25% and, unusually, specified that economic conditions would likely warrant exceptionally low levels for the federal funds rate at least through mid-2013. In addition, Federal Reserve decided in September to engage in what was dubbed as “Operation Twist” and extend the average maturity of its holdings of securities by the end of June 2012. These measures are intended to stimulate the US economy by lowering longer term interest rates and also counteract the adverse growth effects of a necessary fiscal tightening.

Meanwhile, across the Atlantic, the future of the Euro began to be questioned as periphery Eurozone countries continued to struggle in the face of a number of interrelated issues: lack of competitiveness - as reflected by current account deficits, high debt, and lack of growth. Rating agencies lowered the sovereign ratings of a number of countries in Europe. Sovereign debt concerns spread from one country to another and affected the banking system. A confidence crisis began to simmer as counterparties reduced exposure to Euro Area entities. The spread between Bunds and Greek, Italian, Irish, Portuguese, and Spanish bonds rose reflecting heightened risk aversion.

Policymakers tried to stay ahead of events by announcing new measures. The European Financial Stability Fund that had been created in May 2010 to provide support to periphery economies was strengthened. A 50% Greek debt haircut was proposed which would aim to cut Greek debt to 120% of GDP by 2020. Greece’s 2011 debt to GDP was estimated at 153% in March by the International Monetary Fund; estimates put it at 180% by 2020 if unchecked. Italian debt target was set at 113% of GDP by 2014 with a balanced budget in 2013 and surplus in 2014. It was agreed that bank capitalisation should rise with tier 1 capital at 9% by mid-2012. On December 9th, European Union announced plans to provide up to €200 billion to the International Monetary Fund (IMF) to channel resources to periphery Euro Area economies. EU leaders also laid out a new “fiscal compact” to prevent future debt problems and accelerated the start of a planned permanent €500 billion rescue fund.

Meanwhile, the European Central Bank (ECB) which had raised its policy rate - the main refinancing rate - from 1% to 1.5% between April and July in response to inflation that was above its medium term mandate of 2% - backtracked in November by lowering it to 1.25% despite headline inflation at 3%. ECB began to engage in government bond purchases under the Securities Market Programme and expanded liquidity provision to support the banking system. ECB cut the policy rate to 1% on December 8th. On the same date, ECB also announced that it would conduct two “longer term refinancing operations” with a three year maturity at fixed rate and provide full allotment against eligible collateral to support bank lending and money market activity. It also announced a cut in the reserve requirement ratio to 1% from 2%. These measures led to a general tightening in bond yields in periphery Euro Area economies except for Greece.

Euro Area accounts for about 20% of global economic activity. The economic problems in the Euro Area will inevitably permeate to other economies through a number of channels including trade, banking, and asset prices.

In 2012, global growth is expected to further slow down due to fiscal retrenchment in developed economies and the spill-over from Eurozone uncertainty. Monetary policy will remain accommodative as a cushion. Outlook for the Gulf Cooperation Council Region GCC real GDP growth rate accelerated in 2011 to circa 7.4% year-on-year, up from 4.8% in 2010. Qatar, Saudi Arabia, and United Arab Emirates were the main engines of GCC output growth in 2011, with the latter two (along with Kuwait) benefiting from higher oil production to compensate for the disruption in the Libyan oil supply.

Average oil price in 2011 was US$ 105.5 per barrel (Dubai, spot), up 35.2% from 2010 and higher than the 2008 price which had averaged US$ 94 per barrel. As a result, GCC nominal GDP is projected to be up 24.6% y-o-y in 2011, after 17.7% growth in 2010. These growth rates are in stark contrast to 2009 when GCC nominal activity contracted by 19%. GCC nominal GDP reached a record US$ 1.345 trillion in 2011, up sharply from US$ 1.08 trillion in 2010. The GCC economy is estimated to be the 14th largest economy in the world in 2011 after Australia.

Real and nominal GDP growth rates in the GCC are expected to slow down in 2012 because oil production and price are not expected to be higher. There may be a reduction in GCC oil output as Libyan supply comes back on stream and oil price may come under pressure due to an expected global slowdown. Upside risk to the oil price looks likely to hinge on geopolitical tension. The effect of the boost to output growth in Qatar from natural gas expansion will fade going forward as the country has a self-imposed moratorium on further development and current targets have been achieved. GCC real GDP growth is forecast to ease to 4% in 2012. Prospects remain clouded depending on the severity of the fall-out from the sovereign debt crisis in the Eurozone periphery. US Energy Information Administration projects oil prices at circa US$ 100 per barrel provided the global economy does not slow down markedly. Under this assumption, forecasts indicate that GCC nominal GDP will be US$ 1.36 trillion in 2012. UAE’s nominal GDP is forecast to rise to US$ 344 billion in 2012.

The pace of non-oil growth is expected to remain at a similar level to that in 2011. Broadly, strength of non-oil activity across the GCC will be a function of credit growth. Qatar’s non-oil sector continues to grow the most rapidly in the GCC and annual loan growth of 23.8% as of November 2011 reflects the breakneck speed of growth there.

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