Central bankers' perfect condition for growth is not too hot but not too cold - the goldilocks scenario. They love to see an economy moving along at a nice, steady pace while inflation pressures stay moderate.
If economies were rated on these criteria then right now Saudi Arabia would come out on top. The latest data from the non-oil sector that includes manufacturing and services suggests that the economy is expanding at a very healthy clip, which is above its average rate.
Added to this, inflation pressures are also moderating as commodity prices come off their highs. So although growth is expected to fall slightly in the second quarter it is expected to remain strong for the rest of the year.
But while the headline numbers look fantastic on paper, Saudi Arabia needs to be wary that it doesn't become a victim of its own success.
Signs of strength in Saudi contrasts sharply with the latest data coming out of Europe and the US. Most economic indicators have stumbled in recent months indicating that growth is slowing in the West.
In Europe, debt-laden nations like Greece, Italy, Spain and Portugal are implementing tough budget cuts to bring down public spending. This is weighing on growth and pushing up the unemployment rate. Likewise, the UK is also trying to reign in its huge deficit and bring its finances back on track.
In the US, where the recovery has been painfully slow, households are trying to pay off credit cards rather than head to the mall and boost the economy.
Going forward, investors are likely to shun slow-growth/high- leverage economies instead looking for places to invest where growth is strong and finances are stable. Saudi Arabia fits the bill perfectly.
Add to this favourable demographics and you can see why investors will turn their attentions eastwards when looking for a place to park their money.
But this is both a blessing and a curse. Saudi's Tadawul equity index is trading at close to its long-term range. If it breaks higher then you can expect a flood of foreign money trying to buy Saudi-listed stocks. Added to this, some large investment banks have increased their forecast for oil prices this year on the back of high demand and the Libyan crisis. The benchmark Brent crude looks comfortable above $110 a barrel so you can see how easy it will be for money to keep flowing into Saudi's coffers.
While this has some benefits, for example, it will help to fund the Kingdom's massive programme of social spending; it also poses a very real challenge. If the authorities' are not careful then the sweet spot for growth will start to turn sour as inflation pressures start to build throughout the Kingdom.
Commodity price inflation is one thing, but if the Saudi economy is flooded with liquidity in the coming months and years then second-round inflation effects could take hold. That is the worst type of price pressure as it pushes up wages, lowers profits, and eventually causes the economy to stagnate.
The economy might be looking rosy right now, but the authorities' need to make sure it stays that way for the future.
© Forex.com 2011
