Monthly Insights - April 2022

There has been a marked hawkish shift from Fed speakers in recent weeks, with most indicating a desire to take the Fed Funds rate to at least 2.5% by the end of this year. We expect the Fed to raise rates by 50bps in May and June as well as embarking on balance sheet reduction to tighten monetary policy.  While inflation is likely to slow from the summer, it will remain well above the Fed’s 2% target by end-2022. The challenge for the Fed is what level of economic slowdown they are willing to accept in order to tame inflation, and markets are increasingly focused on rising recessionary risks in 2023.

In the MENA region, food inflation has emerged as a key headwind to growth this year, along with higher interest rates. The region is heavily reliant on agricultural exports from the Black Sea region, which have been disrupted by the war in Ukraine. With most North African and Levant countries still recovering from the pandemic, governments have little room to mitigate the inflation in basic food items and several may need assistance from international financial institutions and GCC countries to help finance their twin deficits.

GCC economies are in a stronger fiscal and external position on the back of higher oil production and prices.  Growth in the non-oil sectors is also on track to recover to pre-pandemic levels by next year for the larger economies in the region. However, the GCC will also face the headwinds of higher interest rates and rising inflation, which are likely to dampen consumer demand.

Global economics

UK: Cost of living crisis starts to bite: The IMF recently made significant downgrades to its headline macroeconomic forecasts, citing the deleterious effects on growth of the mounting cost-of-living crisis. With the war in Ukraine showing no signs of de-escalation, and China still following a zero-Covid policy, upward inflationary pressures will remain to the fore.

Regional Economics

GCC: A good start to the year The hydrocarbons sectors have benefitted from increased oil production so far this year, with crude oil production up 12% y/y in Q1 for the UAE and 19% for Saudi Arabia.   Survey data for the first quarter point to a solid expansion in non-oil sectors as well, with strong growth in business activity and new work in the UAE, Saudi Arabia and Qatar.

Regional PMIs mixed in March: Regional PMIs showed mixed results in March. The UAE’s was unchanged, while Saudi Arabia’s rose and Egypt’s declined. Price pressures were prevalent across all three countries, however.

North Africa: Food inflation heading higher North African economies are particularly exposed to the upwards drive in global food prices precipitated by the conflict in Eastern Europe, which will further exacerbate the already extant effects of regional droughts on food supply.

Podcast: Food inflation in MENA The conflict in Ukraine has resulted in higher food prices globally as Ukrainian agricultural exports have been disrupted. Countries in the MENA region are especially vulnerable due their high share of food imports from the Black Sea region. Khatija Haque, Edward Bell and Daniel Richards discuss the food inflation dynamics in the region, the hard choices facing governments and the outlook for food prices over the next 12 months.

Markets

Fed to hike by 50bps in May: The Federal Reserve will start to normalize policy on an aggressive path to tackle the challenge posed by inflation.

Carbon markets in development in the GCC: Carbon markets are in the early stages of development across the major GCC economies of the UAE and Saudi Arabia.

Regional food security at risk from conflict in Ukraine: The Middle East and North Africa region is particularly exposed to the war via higher agricultural commodity costs given the relative shortage of arable land in MENA and its dependency on the flows of commodities from both Russia and Ukraine.

Oil risks remain on the upside: Oil prices have moved their attention away from the threat to supply caused by Russia’s war in Ukraine to considerable downside demand risks in China as the country grapples with comparatively serious Covid-19 outbreaks. That being said, at the same time the war in Ukraine has shown no sign of easing and supply risks still remain acute.

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