Monthly Insights: January 2021

Global Economics

Caveats remain to new year optimism2021 has started the year on a positive footing, notwithstanding the chaotic scenes in Washington DC on January 6, and risk assets have gained momentum. There have been a number of developments which have contributed to these animal spirits, but there remain significant caveats.

Brexit is not over yetThe last-minute agreement largely covers trade in goods, while that for services is to be settled over the coming months. Given their importance to the UK economy this leaves major uncertainties ahead, not least for the economically important financial services sector which employs over a million people and accounts for some 7% of national output.

RBI will remain on hold in February Despite lower-than-anticipated inflation in December we believe that the RBI will keep its benchmark interest rate on hold at 4.0% in February. Nevertheless, we still expect a 25bps cut later in 2021 as soon as the inflationary environment allows, as the bank has reiterated its commitment to an accommodative stance.

Regional Economics

GCC growth to be driven by improving global backdropIn the absence of significant additional fiscal stimulus in the GCC this year, the improvement in the global growth outlook together with a weaker US dollar, record low interest rates and firmer oil prices in 2021 should support the domestic recovery.

Dubai Tourism International visitor numbers are gradually recovering post-lockdown, but remain well below where they were a year ago.

Iraqi finances will remain under pressure Iraq implemented a difficult currency devaluation late last year as lower oil prices and production took their toll on the country’s finances. While things will improve modestly in 2021, Iraq’s finances will remain under pressure and growth will be weak.

Markets

Dollar weakness remains entrenched Dollar weakness remains the short-term narrative for currency markets as the variables that contributed to a sagging greenback in 2020—an aggressive expansion of Covid-19 cases, political uncertainty surrounding elections and policymaking and a lagging fiscal response to the pandemic’s economic impact—remain largely intact.

OPEC diplomacy key to stable oil markets OPEC+ countries will set the trajectory for oil markets in 2021 as the global economy recovers from the Covid-19 pandemic. Unprecedented levels of production cuts from OPEC+ helped to restore oil markets to balance after a calamitous second quarter of 2020 but the cost of withholding production for so long is grinding against the economic priorities and objectives of nearly all OPEC+ producers.

Gold prices stumble to start 2021 The near-term outlook for gold will be linked to how strongly UST yields continue to rise, barring any political surprise that could see a flight to safety.

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