As the global economy navigates a period of uncertainty, the interplay between rising interest rates, geopolitical challenges, and shifting growth trajectories has become increasingly complex.
At the EFG Hermes 10th Annual London Investor Conference, Economy Middle East speaks to Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes Research, about his perspective on both global and regional growth. We also discuss the impact of global economic trends on emerging markets, and the key opportunities driving growth in the region.
What’s your current view on global and regional growth? Which regions are you most optimistic or concerned about, and are there any specific sectors or industries that you concentrate on?
Global growth is challenged by the high interest rate environment that has dominated in the last two years. With rate hikes, monetary policy usually operates with a lag. Therefore, we are yet to see the full impact of the sharp and massive rate hikes that we have seen from developed economies last year.
The health of the Chinese economy is another concern, given the slowing growth and the limited capacity of the government to stimulate the economy. There are several challenges, including geopolitics, which have not been of great help to the health and growth of the global economy. The conflict in the Middle East and the disruptions that it has created in one of the main trading routes globally have been an additional challenge as well.
We expect global growth to be on a slowing trend, which has made room for talks and prospects of central banks moving very quickly to consider and potentially start cutting rates.
What do you expect the interest rate environment to look like, especially in the geographical areas that you concentrate on?
The key driver is what happens in developed economies. We’ve already seen the ECB starting its easing cycle. We also expect the Federal Reserve to commence its easing cycle soon. When the more developed markets ease interest rates, the rest of the world follows. This is good news for emerging markets and Gulf economies since they have pegged currencies and mirror what the Fed does.
We also expect rates to start falling in the Gulf region and that comes with an immediate impact because they match the Fed’s cuts almost on the same day. For countries outside of the Gulf and more classic emerging markets, we expect them to follow with a slight lag until inflation and currency issues normalize. In general, the trend is more on the positive side for emerging markets.
What are some key opportunities that need to be pursued?
In the region, we’re looking at the growth and reform stories. We’re seeing several reforms happening in the UAE and Saudi Arabia with Vision 2030. There is an emphasis on the property sector, especially with the expected drop in interest rates, which are very material for that sector, especially for mortgage demand by retail clients.
Another topic is the decarbonization of Gulf countries, which are witnessing significant investments. In general, we’re looking for reform stories that are dominating the region and the opportunities they create.
What are some long-term macroeconomy trends and what is their direction in the next few years?
The region may witness some decoupling from global trends. Governments here have the capacity to spend, and lower rates will support this capacity, reducing their borrowing costs.
Maybe global growth will slow, and the region can maintain healthy and decent growth levels given low rates, access to finance, governments’ willingness to spend, and the reform stories. This can provide support for being counter-cyclical when it comes to the global growth cycle, which we expect to be on a slowing trend.
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What are some key opportunities you’d be pursuing in the GCC region?
The energy sector provides a key opportunity as more countries shift their focus to decarbonization with significant investments. The key notions of Vision 2030 are also a very big driver of growth and opportunities in Saudi Arabia. In addition, the construction and financial sectors also provide good opportunities.
Given the influx of foreign labor and the creation of new employment in Saudi Arabia, real estate also provides key opportunities as demand rises for new houses. In addition, we’re seeing the beginning of some decent foreign investment that’s also starting to influx there.
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