Economic Research Forum (ERF)

Business Cycles in Kuwait: A New Chronology

1850
Policy-makers, business leaders and forecasters can all benefit from access to data on historical economic and financial cycles as well as the current state of the economy in real-time. This column outlines efforts in Kuwait to develop a chronology of business cycles – one that tracks and projects the dates of expansions and contractions of overall economic activity.

In a nutshell

Easy access to data on business cycles is vital for the economy as well as for policy-makers and researchers.

The Kuwait Institute for Scientific Research has developed a chronology of Kuwait’s various spells of growth cycles of recession and expansions, together with the paths of the output gap and annual growth rates.

Business cycle dating is conducive to better planning by the private sector and better policy design by economic and financial gatekeepers of the economy.

Nearly all countries undergo good economic times followed by more difficult times. During periods of prosperity, incomes typically rise; people find abundant and attractive employment opportunities; and businesses enjoy growth in their sales and profits, which encourages them to invest more and build more enterprises and start-ups.

In contrast, during periods of hardship, incomes recede; jobs become scarcer as many people chase a limited number of job openings; while businesses contract and shops dismiss workers, causing rising unemployment and an increase in the number and proportion of the underprivileged, poor individuals and their families.

In ancient Egypt, for example, people experienced seven years of good weather and bountiful harvests followed by seven years of drought and famine. In modern times, countries that depend heavily on fishing and agricultural crops are often subject to periods of economic peaks and valleys that are dubbed ‘expansion’ and ‘recession’. These might be because of bad weather and poor crop harvest, or insufficient demand in local and/or export markets.

In economic jargon, these successive periods of good and bad times are called business cycles. The duration of business cycles depends on the underlying reasons that trigger them, such as drought conditions or the extent of a demand contraction in export markets, for example, markets for crude oil.

Analysis of business cycles is vital for the economy as well as for policy-makers and students and researchers. As Joseph Schumpeter (1939) remarked, ‘Cycles are not like tonsils, separate things that might be treated by themselves, but are, like the beat of the heart, of the essence of the organism that displays them.’

Kuwait, which depends heavily on oil revenues from export markets, does not have an official chronology of business cycles – one that determines the dates of the onset of recession (trough) and expansion (peak).

Such a chronology, which tracks and projects dates of expansions and contractions of overall economic activity, might be produced by one or more of the key economic institutions – the Central Statistical Bureau, the Central Bank of Kuwait or the Capital Market Authority – or by any of the country’s research institutions.

Absent too is any formal apparatus that monitors and anticipates the performance of the economy over the near-term horizon – the next six to nine months – in a systematic manner with periodicity and frequency that are announced and known to policy-makers and business leaders in advance.

In many countries, policy-makers, business leaders and forecasters can easily access data on historical economic and financial cycles as well as the current state of the economy in real-time. Such access helps agencies and authorities alike to devise appropriate policy responses and reorient action plans.

It is conducive to better business planning strategies by private sector leaders and for designing shock mitigation policy mixes by economic and financial gatekeepers of the economy, including central banks and the banking sector – and in the case of Kuwait, the Capital Market Authority, the Kuwait Chamber of Commerce, the Ministry of Finance and the Supreme Development and Planning Council.

The Kuwait Institute for Scientific Research (KISR) has initiated the process of bridging this gap by amassing and examining the properties of a large compendium of officially published data that vary in length and frequency. KISR then subjected the alternative data series to a suite of academic and business approaches, and analytically blended them to construct a provisional benchmark chronology of business cycles in Kuwait.

KISR then applied statistical analysis to the set monthly and quarterly data to gauge tentative business cycle dates that could be developed and validated further for application as signals of the future state of the Kuwaiti economy.

KISR is deploying data on a large number of series, including real estate prices and traded property size according to location, as well as data on various gauges of interest rates according to terms that cover the period from the start of 2000 to the end of 2016. Other monthly data series date back to the mid-1960s and early 1970s.

The analysed datasets also cover Kuwait’s exports and imports, government revenues and expenditures, the industrial production index (and similar indices for Kuwait’s major trade partners), the number and trade volume of stock market transactions, and banking credit loans to key sectors including the trade sector, the construction sector and the manufacturing sector, as well as personal and total banking loans.

In terms of methodology, KISR followed standard techniques (Hamilton, 1989) to arrive at business cycle recession probabilities and recession and expansion duration. In addition to annual and quarterly growth cycles, the analysis covers other time series data, such as oil exports, foreign exchange and the real effective exchange rate dating back to the start of 1965. KISR also used a model to generate a composite coincidental economic indicator for Kuwait.

In parallel, KISR research pursued the Conference Board’s (2013, 2015) approach to establishing and validating composite leading and coincidental economic indicators for Kuwait. A standard dating of turning points was also applied along with the growth cycle approach to generate tentative chronological order of cyclical patterns in Kuwait (KISR, 2018).

We followed standard approaches by considering the industrial production index as a proxy gauge of coincidental activity in the Kuwaiti economy. KISR validated this approach by growth cycles derived from annual GDP series covering about 67 years, from 1950 to 2016, to detect provisional economic downturns using a combination of growth cycles and output gap.

The timing of the various spells of growth cycles of recession and expansions, together with the paths of the output gap and annual growth rates, are portrayed in Figure 1. The grey areas indicate the timing of economic downturns or recession as derived from the growth cycles analysis.

Being somewhat novel and differentiated, the current research attempt should be construed as only the beginning of what we hope to be a successful effort to fine tune its amassed data, along with the blend of analytical infrastructures, in a way that serves future research and business needs in Kuwait.

Further reading

Conference Board and Gulf Investment Corporation (2013, 2015) ‘Measuring and Monitoring the Business Performance of the Gulf Cooperation Council’.

Hamilton, James (1989) ‘A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle’, Econometrica 57(2): 357-84.

KISR (2018) ‘Kuwait Economic Bulletin: Composite Headlines for Business Cycle Movements in Kuwait’.

Schumpeter, Joseph (1939) Business Cycles, McGraw-Hill

Figure 1:
Chronology of growth cycles in Kuwait, 1950-2016

 

Tags: , , , ,

  • Sulayman Al-Qudsi
    Sulayman Al-Qudsi
    Principal Research Specialist, Kuwait Institute for Scientific Research

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.