Weekly Insights 10 Jun 2021: Should the GCC Prepare for Global Inflationary Spillovers?

 

 

 

 

 

 

Download a PDF copy of this week’s insight piece here.

1. Rising Global Inflationary Pressures

  • Inflation readings have been ticking up across the globe. PMI survey responses have pointed to production disruptions (due to Covid19 surges and related restrictions), supply shocks/ constraints and also higher transport costs (due to container shortages) as reasons for prices. Record stimulus packages to tackle Covid19 have also added to these pressures.
  • The FAO’s latest food price index reading for May showed a 4.8% mom and 39.7% surge – the biggest mom gain since Oct 2010, thanks to the increase in prices of oils, sugar & cereals.
  • Separately, the IMF’s commodity price index breakdown shows that industrial metal prices have increased 70% relative to pre-pandemic levels to a 9-year high in May, outperforming both agricultural & energy commodities. A shift towards clean energy is also contributing to this uptick, as is greater infrastructure spending.
  • While producer price indices have been nudging up, this week’s China PPI surge by 9% yoy needs to be highlighted: it’s the biggest increase since Sep 2008. Though China is facing rising costs of raw materials, it isn’t yet being transferred to final consumers. But, as one of the largest global exporters, China’s prices can be transmitted via trade from one country to another!

 

2. Inflation in the GCC to remain under 3% in 2021

  • Inflation in the GCC has been quite muted in the past few months; in Saudi Arabia, the VAT hike led to a jump from Jul 2020 onwards. The food inflation within the CPI has been ticking up while housing and utilities has seen very marginal increases. Overall, inflation is likely to rise in 2021 (as domestic demand recovers), but remain at an average 2.7% (IMF forecast, Apr 2021).
  • Since GCC nations’ inflation reading can be driven up by trading partners’ inflation, it is prudent to keep an eye out. Food imports as a share of overall imports was least in the UAE (6.7% in 2019) and most in Oman (16.3%). Most GCC currencies are pegged to the dollar and hence cannot address an inflation uptick by letting its currency rise!
  • For now, many business owners are absorbing the higher costs (as mentioned in the region’s PMI surveys) and narrowing profit margins to revive domestic demand.

3. A tale of two nations: wholesale price inflation

  • Wholesale prices – the prices charged between businesses – jumped sharply in Saudi Arabia since Jul 2020, largely a result of the VAT hike to 15% from July 2020. However, the uptick in 2021 (+8.8% in Jan-Apr) has resulted from double-digit increases in metal products, machinery & equipment (+15.2%) as well as ores & minerals (+13.7%).
  • On the other hand, in Kuwait, wholesale price inflation averaged 0.7% yoy in Q1. Kuwait interestingly splits WPI by price of imported goods and locally produced goods: it stood at 0.8% and 0.5% respectively in Q1. At such low readings, it is unlikely there would be pressure to increase prices and pass it along to the consumers.

4. Key takeaways

  • Prices of lumber to oil to metals (aluminum, copper…) are on the rise: current global inflationary prices are likely to continue for a few months. But, as supply bottlenecks caused by factory closings and other restrictions ease, the “supply-led” inflation will likely dissipate.
  • Another important factor factor pushing up prices of metals like aluminum and copper is its use in the renewable energy sector, given the recent push towards energy transition in the backdrop of climate change risks. If this pace slows, prices will come down.
  • For now, major central banks are viewing inflation as “transitory”; but, with the latest US inflation data showing core CPI at an almost 30-year high, these discussions might take a different direction soon. Add to this the potential for spillover inflation from China!
  • Inflation remains under control in the GCC for now and even though food prices are rising, the overall cost of living has been kept in check given relatively low housing/ utilities costs. VAT-related price jumps in Saudi Arabia were one-off and inflation will start easing. But job losses/ salary cuts from last year could take a toll, as seen in Oman a few weeks back.
  • Worthwhile to remember that social unrests leading up to the Arab Spring a decade back came after months of rising food costs (food price inflation in Egypt had hit ~19%)!

 

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