Monthly Insights: July 2021

At the half-year mark, the global economic recovery remains uneven.  Those developed economies which led the way with Covid-vaccine rollouts have seen a sharp rebound in activity in the second quarter of this year, raising questions about whether their central banks should start unwinding some of their exceptional monetary policy support, particularly as inflation has surged.  

The Covid-19 pandemic is far from over however, and the rise in new coronavirus cases in recent weeks as well as the spread of new variants may yet prove a headwind to growth in the second half of this year with implications for the US dollar and risk assets.  

In the MENA region, the current failure of OPEC+ to reach agreement on oil production levels for the rest of 2021 increases uncertainty on several fronts.  GCC budgets may benefit if production remains constrained but at a cost of slower growth for oil producers and higher inflation for everyone.  While we still expect an agreement to be reached that would allow for an increase in production in H2 2021, the alternatives could see oil prices push above USD 80/b or fall below USD 60/b. 

Regional Economics

High oil prices are unlikely to change GCC spending plans: While GCC budgets will benefit from higher oil prices, most governments have committed to medium term fiscal reforms that leave little room for spending a windfall. Moreover, sustained production cuts will weigh on regional and potentially global growth.  

Saudi Arabia Oil production surged in June and likely increased further in July as the kingdom started to unwind the extra cuts from February.  While the oil sector will still likely be a drag on headline GDP this year, we have revised up our forecast for oil GDP to -2.5% from -4.0%.  There are upside risks to our non-oil growth forecast for 2021 as well.    

PMI surveys point to higher input costs and employment in June

Podcast: The Shipping Episode Shipping costs have surged over the last 12 months, as global trade has rebounded strongly on the back of consumer spending in developed markets, while the shipping industry has struggled to keep up with the demand. We talk to Redwan Ahmed, head of investor relations at DP World about the shortage of shipping containers and what DP World is seeing on the regional trade front.

Global Economics

DM central banks holding firm while acknowledging improved growth prospectsHalfway through the year, and the growth prospects for the big developed markets have largely improved since January, with the Federal Reserve, ECB and BoE all significantly upgrading their growth projections in recent weeks. Nevertheless, they remain committed to loose monetary policy.

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

Markets

Oil drifts lower amid uncertain supply outlook Oil markets remain under a veil of uncertainty following the failure of OPEC+ to reach agreement on the next phase of its production cut agreement. 

Currencies at risk from spreading variants The spread of the Covid-19 Delta variant presents some near-term downside for growth in Q3 and consequently for currency markets and risk assets.

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