Monthly Insights - February 2022

While there remain significant tail-risks, the Covid-19 pandemic appears to be easing following the sharp resurgence which began late last year as the Omicron variant spread. With labour markets and activity strengthening, policy focus is now squarely on the inflation story, as price growth around the world accelerates to multi-decade highs. This will be exacerbated by the recent spike in energy prices as tensions have risen in Eastern Europe, which has contributed to our upwards revision to our oil price forecasts for 2022. As such, we now anticipate more aggressive tightening by the Federal Reserve, and we project a 50bps rate hike at the March meeting, and a year-end upper bound of 2.0%.

Inflation will weigh on the recovery in a number of regional economies, with North African countries like Morocco also struggling with a drought which will likely also push prices higher. In the UAE, however, we expect that price growth will remain relatively contained compared to much of the rest of the world. The local economy is also benefitting from a resurgent tourism sector, while the oil sector is also set to see strong growth.

We have revised up our oil sector growth forecasts for the GCC on the back of rising production, and this combined with higher prices will also support the budget balances. We have left our non-oil sector growth forecasts largely unchanged, however, expecting that governments will continue to focus on revenue diversification as they look to decouple their growth cycles from the oil markets.

Global Economics

High shipping prices weighing on global recovery: Under capacity in the global container shipping sector has, alongside shortages in semiconductors (the so-called ‘ships and chips’ issue) been a major driver of some of the supply chain issues and related higher prices that have been seen as the global reopening from the pandemic has gathered pace. These issues have already arguably held back the recovery and are contributing to the cost-of-living crisis that is starting to weigh on the global economy more forcefully.

US macro scorecard:  A round-up of the most widely followed monthly macro data points from the US for December, compared to expectations and the previous month's results.

Regional Economics

GCC: Higher oil prices and increased production are positive for GCC sovereigns, improving budget balances and resulting in higher headline GDP growth estimates for this year. However, we expect governments to remain disciplined on fiscal reform.

UAE: Inflation is expected to remain relatively low in 2022, compared with the larger developed economies.

Dubai: Dubai’s tourism sector in 2021 has recovered strongly from the challenges of the pandemic year with international visitor numbers in Q4 at around 74% of pre-pandemic levels.

Egypt: The Central Bank of Egypt kept its benchmark overnight deposit rate unchanged at its February 3 meeting, the 10th consecutive hold after last cutting rates as the pandemic crisis surged in 2020. The decision was in line with our and market expectations – while it has been clear for some time that the bank has reached the end of its cutting cycle and that its next move will be higher, the conditions did not appear to yet warrant higher rates.

Morocco: We have downgraded our growth forecast for Morocco this year in light of the drought that looks set to exert a sizeable drag on the economy. We now project real GDP growth of 3.1% this year, compared with our previous forecast of 3.8%.

Markets

Fed to move aggressively to tackle inflation: We expect the Federal Reserve to start hiking interest rates from March with a 50bps hike.

Oil prices react to tense geopolitics: The escalation of tensions in Eastern Europe has pushed oil prices up to their strongest levels since 2014. With few immediate sources of relief, we now expect oil prices at a higher level in 2022.

Key commodity markets at risk from crisis in Eastern Europe: Commodity markets broadly will be at risk of squeezes in the event of a serious escalation of tension in Eastern Europe. Price gains across energy, metal and agricultural commodities will all add to inflationary pressures for central banks.

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