(MENAFN- Khaleej Times) The oil price fall will have little impact on GCC economies in the short term, particularly in the case of a diversified economy like the UAE, but for the overall global growth it is good news, leading economist and Nobel laureate Dr Paul Krugman said on Sunday.
Like some of the other GCC economies, the UAE can withstand an oil price shock, especially since Dubai has emerged as a global business and trade hub, Dr Krugman told Khaleej Times on the sidelines of the Arab Strategy Forum on Sunday at which he was a keynote speaker. The impact of a predicted slower global growth on Dubai and the UAE will also be of lesser intensity, he said.
The tumbling oil prices bode well for the overall global economy, he said, and hinted that the growth would be a bit better than the earlier forecast. "As I said before, the growth forecast has to be revised upward by a fraction with the oil price falling to below $60."
However, with the persisting risks of deflation in the euro-area and slower demand in China world economic growth will remain subdued in 2015, Dr Krugman said in a presentation about the state of the world economy at the forum in Dubai which opened on Sunday.
He said since the last recession, deleveraging has not been successful as across the globe there has been a broad increase in debt.
"We have not emerged from the underlying problems that triggered the last recession," he said, adding, "At present two scary regions are the euro-area and China."
Dr Krugman said Japan is close to "not one but two lost decades" and remains in a "deflation trap", while China has an unsustainable economic model.
"China is like Japan in the 1980s, but without the political cohesion," he said. Dr Krugman shrugged off the conspiracy theory that the US is behind the current plunge in the oil prices and said: "I know these people very well; they are not that smart."
He said the oil price decline is closely linked to the weakness in the global economy. "The oil demand is weak from major consumers like China, but additional factors like increased supply from newer sources and the increased price elasticity of oil supply has negatively impacted prices."
Dr Krugman felt Middle Eastern oil producers would have no incentive to cut oil prices, as long as the market prices are above the production cost of shale oil. He said the US Federal Reserve is unlikely to raise interest rates next year as it struggles to meet its inflation target and global economic growth remains weak.
Looking ahead at the economic state of the world in 2015, Dr Krugman forecast economic recovery is still uncertain due to many reasons including the increasing international debt and low industrial production.
He said the economic bubble will continue to grow in 2015. "There's a big gap in supply and demand in the two largest economies in East Asia - China and Japan. This is the main reason the economic bubble will continue to grow. If Japan - which has a lot of advantages in being a relatively large country with a strong economy, stable government and solid infrastructure - is still making an effort to break out of this deflation trap, then other countries will definitely struggle to do so."
"However, China is going to suffer more for not having in place as strong a government coherence and systems integration as Japan does. In addition, China is witnessing an accelerating deflation that is going to prove hard to contain."
The countries that might suffer greatly from low oil prices in 2015 are the oil producing countries that do not have large oil reserves.
On the volatility of oil prices, Dr Krugman said: "The decline in oil prices is caused by the drop in demand due to weaker economies on one hand, and the contrast in oil prices between the major players in the world. The countries that might suffer greatly from the problem of low oil prices in 2015 are the oil-producing countries that do not have large oil reserves."
He said the eurozone would witness a political economic crisis. Looking ahead at the economic challenges in 2015, Dr Krugman said: "Global crises often surface where you least expect. The eurozone will witness a political economic crisis. Greece will end up exiting Europe and there will be a contagious effect."
On the US economy, which has the biggest influence on the world economy, Dr Krugman said: "Statistics show that the United States made significant progress with regards to reducing unemployment - not because more job opportunities were created, but due to fewer people looking for jobs for a variety of reasons. This might be another indication that the US economy is currently a fairly depressed economy unlike what most indications show or say."
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