Skyscrapers Are Warning of Economic Chaos

By 2019, Saudi Arabia is expected to be home to the world’s tallest tower. Developers plan to complete a 1-kilometer tall building in Jeddah. The Jeddah Tower has a design inspired by the growth patterns of desert plants and will soar 170 meters higher than the world’s current tallest building, Dubai’s Burj Khalifa. 

But earlier this week, Emirati developer Emaar Properties announced that it too would construct a building taller than the Burj Khalifa—a stunning skyscraper designed by celebrated architect Santiago Calatrava Valls.  “The Tower” has an expected completion date in 2020 (in time for the Dubai-hosted World Expo) and is likely to have amenities such as observation decks, restaurants, and a hotel.  His Highness Sheikh Mohammed, the visionary ruler of Dubai, on Monday tweeted about his 1960s visit to the observation deck of the Empire State Building, then the world's tallest tower, and his dream to bring the world's tallest building to the emirate.  He also tweeted that "our dream is alive" with an image of the new tower.

The competition for the title of “world’s tallest” concerns me. As I wrote in my book Boombustology and described elsewhere, construction of the world’s tallest tower is usually a sign of hubris and overconfidence. And it’s often associated with bubbles.  A quick historical review of the world's tallest towers suggests today's scramble for height in the Middle East should be concerning.

In 1930, at the start of the Great Depression, 40 Wall Street became the world's tallest building, only to have the owners of the Chrysler Building erect a spire that robbed them of the title. Both, however, were outdone by the Empire State Building, which became the world's tallest in 1932. To read more about this historic race, I highly recommend the book Higher: A Historic Race to the Sky and the Making of a City.

...construction of the world’s tallest tower is usually a sign of hubris and overconfidence.

But NYC and the Great Depression were not the only instance of the world’s tallest skyscrapers and bubbles coinciding. Consider Chicago’s Willis Tower (aka the Sears Tower) and the World Trade Center towers in NYC. Completed in the early 1970s, they prefaced a period of stagflation that felt to many like a bubble bursting. And in Kuala Lumpur, the Petronas Towers were completed just before the Asian Financial Crisis hit Malaysia and Thailand in 1998. The pattern continued: Taipei 101, built at ground zero of the technology boom (at least in a hardware sense), was announced in 1999, not far from the peak of the technology bubble.

Taiwan held the title until 2007 when, within weeks of global markets peaking, the Burj Dubai was named the world’s tallest freestanding structure. Later renamed the Burj Khalifa, the tower opened during a Dubai debt crisis. Want a more recent example? Look East. Fourteen of the twenty tallest towers under construction today are in China.

Before the Chinese slowdown became obvious to the world, China had plans to take the world’s tallest tower title from Dubai. A local developer hoped to build Sky City on a budget of under $1 billion in under 90 days. Interestingly, after China’s investment bubble burst, the foundation for Sky City has since been re-purposed as a fish farm. Oops!

But back to the Middle East, where nations are carrying out their bold construction plans while suffering from the consequences of low oil and gas prices. The commodity crash forced Saudi Arabia to run budget deficits, call into question the generous benefits it lavishes on its citizens, and even consider floating shares of its crown jewel, Aramco. The Saudi stock exchange is down by almost a third, the money supply has shrunk for the first time since 1994, and the credit ratings of local banks are slipping.

The United Arab Emirates, while more diversified than its larger neighbor, has also been feeling the pain of the oil price shock. Dubai’s private sector economy contracted for the first time since 2009, property prices have been falling, and the government is mired in debt. This all comes as the emirate is, among other things, still trying to complete its bold construction of artificial islands off the coast. 

Another Persian Gulf nation, Qatar, also appears overconfident in some regards. In 2015, it is believed that the Qataris set a world record price for a work of art, purchasing a Paul Gauguin painting for $300 million. The country already owned the previous world record (set in 2012) for paying over $250 million for a Cézanne. Now, analysts are warning that Qatar has gone through an unsustainable credit boom, which has inflated asset prices. Real estate values, for example, have doubled in the last four years. 

And of course, there’s the upcoming OPEC meeting in Qatar. Analysts will closely watch what happens in Doha, where member states will try to negotiate an output freeze. Many are skeptical that any meaningful progress is possible; after all, most nations are already producing near capacity, making production increases highly unlikely from here. On top of that, Iran hopes to ramp up oil production as international sanctions are removed.

Last month, I had the chance to spend some time talking with noted oil analyst Daniel Yergin while I was in the Middle East. He expressed concern for the region’s ability to cope.  And more recently, he’s stated he believes OPEC has likely lost the power it once had to manipulate world oil prices. The pressures mounting on Saudi Arabia and others are rising.

OPEC has likely lost the power it once had to manipulate world oil prices...

All of these data points might easily be dismissed as noise. But I’d encourage you to look at them differently. Yes, it’s impossible to predict oil prices. Sure, the outlook for Middle Eastern economies is blurry at best. But looking broadly—at unconventional data points like the skyscraper indicator—can help us navigate radical uncertainty. And combining these insights with other developments can help us steer a path through these global economic cross currents. Maybe add this fact to the mix: the World Bank is currently receiving more requests for loans (outside of a financial crisis) than at any time in its history. 

In times like these, we need to pay attention to the warning signs and proceed with caution.  We can hope for prosperity and continued growth, but it's best to prepare for continued uncertainty and possible economic chaos.

Vikram Mansharamani is a Lecturer at Yale University in the Program on Ethics, Politics, & Economics. He is the author of BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst (Wiley, 2011). Visit his website for more information or to subscribe to his mailing list.  He can also be followed on Twitter or by liking his Page on Facebook.