Weekly Economic Commentary – Jun 18, 2017


In a week where Russiagate personally involved Trump for the first time and macro data disappointed, Wall Street struggled to post a gain. Treasuries weakened as the Fed confirmed its hawkish stand on rate hikes and announced a snail pace program for offloading its USD 4.5 tn balance sheet. Furthermore, the sell off in tech shares was exacerbated by Goldman Sachs warning that investors are being oblivious to risks like cyclicality and regulation. European bourses were mostly down and emerging markets did not take well the Fed’s decisions. Regional markets on the other hand were mostly positive or flat, despite the row triggered by the sanctions imposed by the UAE, Saudi Arabia and Egypt against Qatar. In currency markets the dollar weakened after poor housing data and worsening consumer sentiment. Oil prices posted a fourth consecutive weekly loss (the longest stretch of weekly losses since 2015) to the lowest close in 7 months. The catalyst for the slippage were US inventories that fell less than expected (keeping supplies more than 100 mn barrels above the 5-year average) and the news that Libya will boost its output by 1 mn barrels per day at the end of Jul. Gold fell for the second week in a row as no geopolitical scare worried investors.

Global Developments


  • The US Fed, as widely expected, raised its target range for the fed funds rate by 25 bps to 1-1.25%. The Fed also finally disclosed a plan to shrink its balance sheet (probably starting as early as Sep) by selling USD 10bn per month (USD 6bn in Treasuries and USD 4bn in agency/mortgage-backed securities).
  • US CPI inflation dropped to 1.9% yoy from 2.2% in Apr. Somewhat stronger food inflation (+0.9% yoy vs +0.5% in Apr) was offset by dwindling energy and core inflation.
  • US industrial production was unchanged in May; manufacturing output lost -0.4% mom while mining output advanced 1.6% and utilities output 0.4%. Capacity utilization edged down -0.1%.
  • US retail sales unexpectedly slipped -0.3% mom (+3.8% yoy) in May vs 0.4% in Apr, mainly due to lower gasoline (-2.4% mom) sales and sales in electronics and appliance stores, department stores, and other retailers. Core sales, ex auto and gasoline, were flat vs 0.5% in Apr.
  • Housing starts in the US plunged -5.5% mom (-2.4% yoy). Completions rose thanks to the backlog, but housing permits declined. Hence residential construction will be sluggish until end 2017, due to oversupply.
  • The University of Michigan consumer sentiment index tumbled 2.6 points to 94.5, the biggest drop since Oct to the lowest level since Nov. Current conditions retrenched for the third month and expectations dropped by 3 points to 84.7. Inflation expectations remained at 2.6%. However, the index is still near the top of the 85-100 range where it has fluctuated since Oct 2014.
  • US business inventories fell -0.2% mom in Apr offsetting the 0.2% increase in Mar. Retailers and wholesalers dragged down inventories by -0.2% and -0.5%, respectively. Manufacturers gained 0.1%. The Q2 GDP will likely be negatively affected.
  • US initial claims for unemployment insurance declined by 8,000 to 237,000. The 4-week moving average crawled up by 1,000 to 243,000. Continuing claims rose 6,000 to 1.935 mn.


  • The Eurozone’s inflation rate dropped to 1.4% yoy in May from 1.9% in April, thanks to low oil prices. Core inflation also slowed to 0.9% yoy from 1.2% in Apr.
  • Eurozone industrial production in Apr jumped unexpectedly by 0.5% mom, while Mar’s -0.1% drop was revised up to +0.2%. Energy production led the gains. Weak data in France, Italy and Spain were counterbalanced by the performances of Germany and Holland.
  • The Eurozone’s external trade surplus narrowed in Apr to EUR 17.9bn, sharply down from EUR 30.9bn in Mar and EUR 26.6bn in Apr 2016.
  • The ZEW investor confidence index in Germany in Jun was down 2 points mom to 18.6. The current situation sub index rose to 88.0 in Jun, vs May’s reading of 83.9. The ZEW expectations measure for the Eurozone climbed to 37.7 in Jun from 35.1 in May.
  • Inflation in the UK reached 2.9% yoy in May from 2.7% in Apr, the highest rate in 4 years. Prices for services such as recreation and culture stood out but the increase was broad-based. Talks about stagflation as a result of Brexit and the ensuing GBP slide are intensifying.
  • The Bank of England kept rates on hold although three members of the MPC voted for a hike to counter inflation pressures.
  • UK retail sales fell -1.2% (0.9% yoy) in May, reversing a 2.5% (4.2% yoy) increase in Apr. The fall was broad-based, with household goods stores recording a -5.7% mom dive.
  • Greece’s creditors agreed to grant EUR 8.5bn in new loans ending months of uncertainty over a large bond repayments due in July and avoiding another summer drama.
  • The Central Bank of Russia reduced its rate by 25bps to 9% as inflation gets closer to its 4% target.

Asia Pacific:

  • The Bank of Japan left its policy tools unchanged, but expressed a more positive view on the economic outlook. Inflation remains at rock bottom and the BoJ is almost exhausting the Japanese government bonds to purchase.
  • China’s M2 money supply growth slowed sharply to 9.6% yoy in May (a historical low since the record began in 1996), from 10.5% in Apr. Nevertheless credit growth is still perky in real estate and overall financial conditions are hardly tight.
  • In China, fixed asset investment growth slowed to 8.6% yoy May from 8.9% in Apr as a consequence of tighter credit for real estate and capacity adjustment in heavy industries.
  • China’s industrial production growth leveled off in May at 6.5% yoy, the same rate as in Apr, due to the export sectors, which are not firing on all cylinders anymore.
  • China’s retail sales expanded 10.7% yoy in May exactly as in Apr. Consumers are opening their wallets although this might be due to higher food prices. Nevertheless buoyant employment and income growth will provide a long-term positive impulse.
  • India’s CPI inflation decelerated to 2.8% yoy in May, from 3% in Apr, thanks to subdued food prices (following a bountiful monsoon season) offsetting higher energy costs. Prices of manufactured goods also remain low.
  • India’s industrial production growth rebounded to 3.1% yoy in Apr after 2.5% in Mar. The figure is hardly stellar, as the impact of removing 86% of currency in circulation is still felt. The industrial production time series has been revised making difficult the comparison with the past.
  • Singapore’s non-oil exports declined -1.2% yoy in May, vs Apr’s -0.7%. Electronics exports are strong, having grown for seven straight months, while non-electronics have been contracting in annual terms.

Bottom line: Signs that the malaise of the American economy is not temporary are piling up, as consumers’ sentiment worsens, industrial production stagnates, retail sales decline and the construction sector takes a blow. After all, the current expansion, albeit feeble, by historical standards, is becoming the longest on record in the US and it cannot last forever. Changes that could provide a boost, such as comprehensive corporate and personal tax reforms, infrastructure investments plans, overhaul of botched regulations (especially in banking) look increasingly unlikely given the political mayhem building up around Russiagate. The OECD composite leading indicator in Apr was flat for the third consecutive month. The headline indicates steady growth in both the OECD area as a whole and in some of the main economies, but additional acceleration is unlikely. Outside the OECD, activity was stable in the five major Asian economies, while Brazil and Russia are progressively improving.

Regional Developments

  • Bahrain’s sovereign wealth fund Mumtalakat reported a 140% rise in net profit to BHD 68.9mn in 2016 (in 2015, profits were depressed by an adjustment on goodwill against Alba caused by lower aluminum prices). According to its CEO, about 78% of its assets are in Bahrain, 20% in the GCC and the rest in other parts of the world (including the US). He also disclosed that the SWF is looking for opportunities in US and Saudi Arabia, and has USD 200-300mn for new deals.
  • Bahrain’s central bank issued new rules to create a regulatory unit for FinTech firms; the framework will provide a virtual space for companies to test their technology-based ideas (for 9 months, with a maximum extension of 3 months) and is open to existing businesses licensed by the central bank and other local and foreign firms.
  • Bahrain and Saudi Arabia plan to build a new road and rail causeway, estimated to cost USD 4-5bn, to ease congestion on the existing link. The project is expected to be owned by the private sector through a new company with a 25-30-year public-private partnership arrangement.
  • GDP in Egypt grew by 4.3% in Q3 of the 2016-17 fiscal year, thanks to growth in the communication, tourism and manufacturing sectors, according to the planning minister. Separately, the World Bank in its Global Economic Prospects report projected Egypt’s growth at 3.9% in the 2016-17 fiscal year which ends in Jun, to be followed by 4.6% and 5.3% growth in the coming two years.
  • Egypt’s budget deficit dipped to 8.4% in the period Jul 2016- Mar 2017 from 9.4% during the same period last year.
  • The current account deficit in Egypt narrowed by 37.7% to USD 3.5bn in Q3 of this fiscal year, supported by the currency floatation. In Q3 of this fiscal year, remittances were up by 10.49% in Jan-Mar to USD 4.62bn and trade deficit narrowed by 8.1% to USD 9.2bn; balance of payments recorded a surplus of USD 11bn.
  • Egypt’s tourism revenues grew by 128.3% yoy to USD 1.3bn in Q3; number of tourists were up to 14.2mn in Q3 from 6.9 a year earlier. Separately, the state statistics agency disclosed that Egypt welcomed around 5.4 million tourists during 2016, of which more than half were from Western Europe and Middle East (32.7% and 29.3% respectively).
  • Egypt’s central bank removed limits on international currency transfers last week, scrapping a USD 100,000 monthly limit on individual bank transactions. The central bank however did not comment on the USD 50,000 per month deposit cap for importers of non-priority goods.
  • Saudi Arabia’s total investments in Egypt’s Sinai Peninsula (through the Saudi Fund for Development) have risen to USD 900mn, with the most recent injection of USD 400mn, according to Egypt’s Minister of Investment and International Cooperation.
  • Egypt and Germany signed three agreements worth EUR 203.5mn (USD 228.3mn) spanning the areas of renewable energy, education, small and medium-sized industries, and irrigation.
  • Tourists into Jordan grew by 10.5% to 2.6mn in Jan-May this year. Total number of overnight tourists grew by 11.5% to 1.663mn during this period.
  • Kuwait’s General Department for Residence Affairs disclosed that the residence permit of approximately 11,500 expatriates (parents and siblings) would be renewed. However, plans are being considered to raise residence fees and health insurance to KWD 300 (from KWD 200) and KWD 200 (from KWD 50); additionally, the sponsor’s salary needs to be at least KWD 1000.
  • Lebanon approved the country’s first proportional vote law, paving the way for holding the first legislative elections in nine years in May 2018.
  • Total credit by commercial banks in Oman during Q1 grew 3.5% yoy to OMR 19.71mn. Personal loans accounted for 40% of the total.
  • Gross electricity production in Oman rose 5.7% to 6,552.5 GW by the end of the Q1, from 6199.7 GW, while net production rose by 6.8% to 6,308.5 GW.
  • Qatar’s central bank governor stated that there were no disruptions to domestic or international transactions; he also mentioned that central bank had enough foreign currency reserves to meet all requirements.
  • Saudi Arabia’s Ministry of Water, Environment, and Agriculture last week launched several water-related projects worth SAR 4.9bn.
  • Saudi Arabia will begin collecting the new monthly fee of SAR 100 for every expat dependent from next month, and the fee will be gradually increased every year till 2020. The additional levies and taxes on expats and their families is expected to generate around SAR 65bn by 2020. Companies that have more foreigners than locals on their payroll are currently spending SAR 200 every month for every expatriate; this fee will now be levied across the board, but at a discounted rate for those companies with fewer expats than citizens.
  • A government committee in Saudi Arabia is studying a proposal to close Al-Jowharah Stadium and King Faisal Specialist Hospital north of Jeddah (estimated to cost SAR 3.7bn) in order to open a economic free zone.
  • Saudi Arabia’s crude oil exports are expected to fall below 7 million barrels per day (bpd) from June, with announcements of a cut of 300k bpd to Asia for July; exports in May had already averaged below 7mn bpd while total production was 9.88mn bpd. Furthermore, the energy minister disclosed that a drawdown in crude oil inventories would accelerate in the next three to four months.
  • Saudi Arabia’s Ministry of Water, Environment, and Agriculture last week launched several water-related projects worth SAR 4.9bn.
  • Saudi Arabia continues to dominate construction market in the region, with more than USD 250bn worth of projects in the pre-execution phase, according to a recent Meed This is almost as much as the UAE and Qatar – at USD 184bn and USD 69bn respectively.
  • Growth in the GCC is expected at 1.3% this year, the weakest since 2009, according to the World Bank’s Gulf Economic Monitor. Growth is forecast to pickup to 2.6% in 2019, thanks to non-oil sector activity amidst reforms and easing of fiscal austerity measures. (The report can be accessed at: http://documents.worldbank.org/curated/en/481401497357173169/pdf/116205-v1-replacement-PUBLIC-gulf-monitor-June-2017-002.pdf)
  • All GCC central banks except Kuwait raised rates by 25 bps, following the Fed hike. Kuwait kept its discount rate flat at 2.75%, citing improvements in liquidity and concerns about economic growth.
  • The UAE accounted for 62% of MENA private equity investment activity by value and 34% by volume in 2016, according to the Private Equity & Venture Capital Annual Report of the MENA Private Equity Association. While overall disclosed transactions reached 244 (the highest since 2008), the value of disclosed investments decreased by 25% to USD 1.1bn. (The report can be accessed at: http://www.menapea.com/research-association.php)

UAE Focus

  • The Dubai Economy Tracker Index clocked in at 55 in May, recording the slowest improvement in 7 months, and down from Apr’s 57.7 (a 26-month high). Sector-specific indices had construction leading at 56.2, followed by wholesale and retail (55.5) and travel and tourism (54.2).
  • Consumer prices in Abu Dhabi grew by 2% yoy in May, bringing year-to-date price increase to 2.2%. The housing, water, electricity, gas and other fuels’ group reported a 3.5% rise in prices during Jan-May, and contributed 55.3% to the overall increase in inflation.
  • Foreign investors bought AED 2.28bn worth shares on Abu Dhabi Securities Exchange market (ADX) in May; this represents 60.9% of total trades. Market capitalisation of domestic companies listed on ADX dropped by 1.6% mom to AED 426.9bn in May.
  • Saudi Arabia’s Kingdom Holding Company acquired a 7.11% stake in Dubai-based Careem for USD 62mn, bringing the total investment in Careem to USD 500mn.
  • Average room rates in Dubai rose by 11.4% yoy to USD 279 in Apr this year, according to a data provider HotStats; room occupancy rose to 87.8%, while total revenue per available room was up by 13%.

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