Kuwait: November 10, 2019


Following public divisions over recent stimulus measures, policymakers at the European Central Bank presented a more united front at their October meeting, which was Mario Draghi’s last as bank president before being replaced by Christine Lagarde on November 1st.

  • Serious hope of a breakthrough in trade talks between the US and China provided strong support for global markets during October. Markets, especially in the US, were further bolstered by the Fed cutting its target rate by 25 bps and a series of strong economic data which appeased recession concerns.
  • The MSCI AC World Index added 2.64% during October for a year-to-date return of 17.28%, while the MSCI EM Index outperformed for the month with a gain of 4.09% and 7.89% since the beginning of the year.
  • Oil prices remain weak and markets clouded by concerns of a slowing demand resulting from a weakening global economy. OPEC reduced its forecast for oil demand for the third straight month in October. It is now projecting a demand of 0.98mb/d for 2019 down from 1.02 mb/d a month ago.
  • GCC markets remained under pressure in October as the S&P GCC Composite declined by 2.67%weighed down mainly by a 4.3% loss in Saudi equities, in addition to 1.72% and 1.23% declines in Qatar and Dubai.


US economic data continues to come in mixed, but mostly points to moderate growth going forward with risks to the downside. GDP in 3Q19 was actually slightly stronger than expected at an annualized 1.9% (consensus 1.7%), down only fractionally from 2.0% in Q2 and amid a still strong performance from consumer spending, up 2.9%. Meanwhile the labor market remains in decent shape with non-farm jobs rising a solid 128,000 in October and wage growth unchanged at 3.0% y/y. However forward-looking indicators remain in the doldrums, reflecting a loss of momentum compared to last year, the trade war impact, and worries over the aging economic cycle. PMI measures for both manufacturing and services, at 51 in October, indicate barely any growth at the start of 4Q19, while components of GDP sensitive to business confidence and the external sector (investment and exports) were weak in Q3. Early projections by the Atlanta and New York Feds have growth slowing to a range of 0.8-1.1% in 4Q19.

In order to mitigate the downside risks to growth, the Federal Reserve as expected cut interest rates by 25 bps for the third time since July, leaving the Fed Funds target range at 1.50-1.75%. But the cut was considered ‘hawkish’, with two of 10 members again voting to leave policy on hold and post-meeting comments by Fed chair Jay Powell indicating that what he has termed a ‘mid-cycle adjustment’ in rates is now over, implying no further cuts ahead. Futures markets expect rates to be on hold until next spring, and a 73% chance of at least one cut by end-2020.

Aside from the prospects for economic activity, another thing that concerns the Fed is the weak outlook for inflation, which fell back to 1.7% y/y in September on its preferred core Personal Consumption Expenditure (PCE) measure, from 1.8% in August and below the 2% target for the ninth consecutive month. Surveys show inflation expectations dropping and prospects will weaken further it tariff hikes fail to materialize as part of a temporary US-China trade deal, which may be close. The Fed worries about Japan-style deflation risks, which are also now threatening the Eurozone; given the apparent insensitivity of inflation to ultra-low interest rates in recent years, a further fall in inflation could be tough to address.


The Bank of Japan left monetary policy broadly unchanged last month but tweaks to its forward guidance suggest that it is willing to pull its policy rate further into negative territory in a bid to prop up the economy and ultimately reach its (elusive) 2% inflation target. The economy remains weighed down by weaker global demand, not least because of ongoing US-China trade tensions. Indeed, fresh data showed exports falling for the 10th straight month in September by a larger-than-expected 5.2% y/y. Meanwhile imports also fell for the fifth consecutive month, by 1.5%, pointing to continued weakness in domestic demand; although retail sales growth surged to an almost six-year high in September, this was mostly driven by front-loading of spending ahead of the October sales tax hike which could reverse in 4Q19. Against this backdrop, the government downgraded its assessment of the economic climate for the third time this year in October, raising the stakes for additional easing in the months to come.


In its pre-budget statement, the Saudi ministry of finance lowered its forecasts for revenue, expenditure and economic growth. The budget deficit for 2019 is now seen at 4.7% of GDP this year (4.2% previously), and is projected to widen to 5.0% of GDP in 2021 (3.7% before). The changes reflect both lower oil prices and lower royalty rates on Aramco’s oil sales, which necessitate lower budgeted spending. GDP growth forecasts were also cut for 2019 to 0.9% (2.6% before) and for 2020-22 to 2.2-2.3% per year (2.7-2.8% before). Saudi Aramco, meanwhile, published its intention to float, with the firm expecting a valuation close to $2 trillion when it lists on the Riyadh stock exchange while investors are estimating a valuation in the $1.2-2 trillion range.

Finally, GCC countries did well in both the latest World Bank Doing Business and the latest World Economic Forum Competitiveness rankings. Saudi Arabia’s Doing Business rank jumped 30 places to 62, while the UAE still lead the way in the Gulf with a rank of 16. Kuwait’s score in both metrics also significantly improved.