How will a slowing EU impact the GCC?

Dubai - European bloc was region's No.1 trading partner in 2018, followed by China, Japan and India

The European Union is the UAE's largest single trading partner, accounting for 11.5 per cent or ?55 billion per year of its foreign trade. The 1988 Cooperation Agreement, a trade compact signed under the umbrella of the GCC, allows the EU to export services and manufactured goods to the bloc. In return, GCC countries export fuels, mining products and chemicals to the EU.
Trade between the blocs is brisk and growing. The EU was the GCC's No.1 trading partner in 2018, followed by China, Japan and India. European manufacturers export mainly power plants, trains, aircraft, electrical engineering products, machinery, transport equipment and chemicals to the GCC countries. In 2017, there was ?143.7 billion worth of trade between the EU and GCC. Out of that total, the EU exported ?99.8 billion worth of goods to the GCC, meaning a significant surplus for the EU and trade that is heavily weighted by the manufacturing sector.
Given the booming bilateral trade, it's glaringly obvious that the eurozone's recent slowdown due to factors like Italy's technical recession, Brexit and slowing global growth may impact the UAE and GCC countries. On the upside, it could mean that products from the EU will become more competitively priced and stimulate buying interest from the GCC countries. Europe's central bank remains dovish and doesn't appear keen to raise interest rates until at least the middle of 2019. Thus, the euro may weaken against the dollar-pegged UAE dirham, meaning more purchasing power for the GCC area and possibly leading to higher profits for importers.
Depending on how much the EU's economy slows down, the trade surplus could add up fast in the EU's favour because industrial goods may become cheaper. The European Commission expects growth to remain moderate and believes that economic fundamentals are still solid. Full-year GDP growth is expected to have slowed from 2.4 per cent in 2017 to 1.9 per cent in 2018. Along with the changing economic situation, it's possible that bilateral trade may come back under the spotlight and there's a chance that trade talks with GCC countries could be reinvigorated as the EU seeks to mitigate the effects of a hard Brexit and strengthen its relations with alternative large regional blocs throughout the world. Amid the backdrop of a eurozone slowdown, the GCC would be holding more trump cards if negotiations were to start up again.
On the downside, oil and other exports from GCC countries to the EU could suffer if the slowdown worsens and the euro depreciates further against the dollar. European manufacturers may be forced to seek cheaper oil and other fuels used in factory processes that are closer to home and cost less to transport. The extent to which this may happen depends largely on how the oil price develops throughout the year, and if the level of demand from Europe drops it could even pressure the oil price downwards. In an economic slowdown, companies prioritise cost-cutting, so if the oil price rallies unexpectedly for any reason, the potential for a drop in oil exports from the GCC to the EU is a possible risk to be considered.
The slowdown in the European Union carries with it another big question mark about direct foreign investment from the EU into the GCC. FDI may rise or fall depending on how fast Europe's economy declines. If growth remains moderate amid more volatility in Europe, investors may be attracted to the prospect of investing in the GCC countries, bringing in more foreign reserves and investment capital. The reverse could hold true if the EU's economy shrinks at a faster pace and reduces the capacity for Europeans to invest abroad.
Finally, there's a risk that tourism from the EU to the GCC may be reduced if the euro weakens further against the dollar, making travel less affordable for Europeans. The eurozone's slowdown carries with it risks and opportunities for the GCC countries, so investors may want to monitor developments in the bloc's GDP growth, PMI reports and other key economic data.
The writer is global head of currency strategy and market research at FXTM. Views expressed are his own and do not reflect the newspaper's policy.