Monthly Insights - March 2022

The conflict in Ukraine and the sanctions on Russia will exacerbate already high inflation by pushing up prices of food, energy and industrial metals.  It will also have a negative impact on global growth, with some regions more severely impacted than others.  The additional uncertainty around the economic outlook has made policy-making even more challenging for governments and central banks. The Fed finally got its hiking cycle underway last week, and has signalled a much faster pace of tightening than just a few months ago.  The Central Bank of Egypt also surprised the market with an earlier than expected rate hike as it seeks to keep its real interest rate positive and respond to growing inflationary pressures.  

Higher interest rates and a stronger US dollar will be a  headwind to non-oil growth in the GCC, although this will be more than offset by accelerated oil and gas GDP growth. There is room for governments in the GCC to absorb some of the impact of higher energy and food prices as their budgets are now on track to record significant surpluses this year. However, we expect governments to remain committed to fiscal reform and do not anticipate a broad-based increase in spending on the back of this year’s oil windfall.

Global Economics

Central banks are in full inflation fighting mode The Fed has prioritized tackling inflation even at the cost of slower growth. However, it still assumes unemployment will continue to fall this year and remain low through 2024.

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

Regional Economics

Saudi Arabia: The economy grew by a faster than expected 3.2% in 2021 on strong private sector consumption and investment. We have revised up our forecast for 2022 GDP growth to 7.7% (7.5% previously) to take into account the latest data.

Egypt: The Central Bank of Egypt hiked its benchmark rate 100bp in an unscheduled meeting this week. The EGP has depreciated as the central bank stressed “the importance of exchange rate flexibility to act as a shock absorber to preserve Egypt’s competitiveness.” An agreement on an IMF programme is expected soon.

Regional PMIs rise in February The impact of Omicron in the GCC appears to have been relatively shortlived and restrictions on travel and activity were further eased in February.

Dubai: Dubai’s tourism sector is off to a strong start in 2022.

Markets

Fed starts its fight against inflation: The Fed hiked rates by 25bps at its March FOMC but has opened the door to more aggressive tightening later this year.

Commodities to price in new supply risks: Commodity markets will need to find new equilibrium prices among the enormous risks affecting supplies.

Energy markets need to reprice geopolitical risks: Security of supply will be much more valued in a new geopolitical era for oil markets.

Crisis in Eastern Europe roils markets: Financial markets will need to endure a geopolitical crisis amid tighter policy from the Federal Reserve.

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