Darkening Outlook For Global Economy Threatens Crude

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By Nick Cunningham

Hong Kong Stock Exchange

“The outlook for the global economy in 2019 has darkened.”

That conclusion came from a new report from the World Bank, citing a variety of data, including softening international trade and investment, ongoing trade tensions, and financial turmoil in emerging markets over the past year. “Storm clouds are brewing for the global economy,” the World Bank warned.

As a result, economic growth in emerging markets could “remain flat” this year, while overall growth could be “weaker than anticipated.”

One of the key backdrops to this assessment is the rate tightening from the U.S. Federal Reserve. “Advanced-economy central banks will continue to remove the accommodative policies that supported the protracted recovery from the global financial crisis ten years ago,” the World Bank report said. After several rate hikes in 2018, the Fed had suggested that two more were on the way in 2019, although the central bank’s chairman Jerome Powell recently softened that tone.

Higher interest rates and a corresponding strengthening of the dollar puts enormous pressure on indebted countries, companies and consumers in emerging markets. Such countries are vulnerable to sudden capital outflows, which could leave them crushed under the weight of dollar-denominated debt. Worse, government debt in low-income countries has surged over the last four years, from 30 percent of GDP to 50 percent of GDP, according to the World Bank.

Growth contracted in Japan, Italy and Germany in the third quarter of last year, and financial turmoil rocked global equities in the final few weeks of 2018.

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“At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” said World Bank Chief Executive Officer Kristalina Georgieva. “As economic and financial headwinds intensify for emerging and developing countries, the world’s progress in reducing extreme poverty could be jeopardized.

The irony is that over the last two weeks, sentiment has been on the rise. Expectations of a thaw in the trade war between the U.S. and China has boosted equities, while also driving up the price of crude oil. The potential reassessment of rate hikes from the Fed has also been warmly welcomed by investors.

But that does not negate the trouble brewing for the global economy. Even a breakthrough in the trade war might not be enough to head off a slowdown. “A trade deal between the US and China, however, is likely to slow but unlikely to reverse the deterioration seen recently in forward-looking economic data from the US to Europe and China,” Ole Hanson, head of commodity strategy at Saxo Bank, wrote in a note.

China just reported the first annual decrease in auto sales in more than two decades, a glaring sign of an economic slowdown. Auto sales slumped by 6 percent in China in 2018, according to Bloomberg, and Goldman Sachs predicts another contraction of about 7 percent this year. China is home to the world’s largest auto market, so the plunge in sales spells trouble for carmakers everywhere.

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This figure isn’t all bad, however. The sudden deceleration in auto sales is also a sign of energy transition. Ride-hailing services, and the rise of electric vehicle sales in China are potentially foreshadowing the peak of the internal combustion engine. EV sales topped 1 million for the first time in China in 2018, and could surge by another third this year to 1.6 million, according to Bloomberg and The China Association of Automobile Manufacturers (CAAM).

“Demand for vehicles is still there, yet it may take about three years for the market to pick up pace,” CAAM said. “The overall uncertainties that may undermine car purchases include volatility in economic development and China’s trade relations with the U.S.”

The oil market has shrugged off many of these negative indicators at the start of 2019. WTI rebounded above $50 per barrel this week, and Brent briefly touched $60 per barrel. Both are closing in on official bull market territory, up nearly 20 percent from the low point hit in late December.

For now, the OPEC+ cuts, the improved outlook on U.S.-China trade talks, and the softer line from the Fed have encouraged oil traders. However, the warning from the World Bank should not be ignored.

By Nick Cunningham of Oilprice.com


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